Updated from July 9th to include pricing information from Alibaba IPO scattered throughout.
NEW YORK (TheStreet) -- After Alibaba's initial public offering, Yahoo! (YHOO) and CEO Marissa Mayer may be looking to put some of the $5 billion new windfall from the sale to work buying companies that can boost revenue and engagement.
"It feels like most small and mid-cap Internet companies are possibilities," said one hedge fund analyst, who declined to be named. "Given the recent deal for Community, it seems she [Mayer] is desperate for content." The analyst owns Japanese-based Softbank -- which holds a stake in Yahoo! Japan, and not Yahoo! -- because "of the risk" of what Mayer might do once the company receives the cash infusion from the Alibaba stake sale.
A Yahoo! spokesperson said the company doesn't comment on rumors or speculation.
Yahoo! is required to sell 140 million shares of its Alibaba holdings (down from a previous 208 million) in the IPO, expected to take place Friday morning, which would significantly boost its balance sheet. At the end of the second quarter, Yahoo! held $4.3 billion in cash, compared to $5 billion at the end of 2013, a drawdown of $700 million.
Much of the speculation about what Sunnyvale, Calif.-based Yahoo! will do with its new cash has centered on the core business, search and advertising, which has declined in recent years, as companies like Facebook (FB) , Google (GOOG) and others get advertising dollars.
Yahoo! holds nearly 24% of Alibaba, which is expected to start trading tomorrow, after the IPO prices tonight. Alibaba recently upped the price of its offering to a range of $66 to $68 a share, due to very strong demand, something Jeffrey Sica of Sica Wealth Management said was a result of "less retail investors than expected and a lot of institutional investors." That would make Alibaba worth around $160 billion, before it even hits the open market. That would make Yahoo!'s stake worth around $38 billion, while the entire company is worth just $42.5 billion, as of yesterday's closing price. Yahoo!'s current market capitalization takes into account not only the Alibaba stake, but a 35% stake in Yahoo! Japan, as well as its core business.
Yahoo! has more than 450 million mobile users, a statistic Mayer and CFO Ken Goldman have touted several times, as the company transitions to the mobile age. Not only is Yahoo! adding mobile users, growing at 100% in just over two years, they are actively using the company's apps, Mayer noted. "In addition to driving user growth, mobile has also delivered step changes in engagement with the time spent on mobile growing 79% in the last year alone," she said on the second quarter earnings call.
Mayer has said that Search, Communications, Digital Magazines and Video are the four key areas of interest for Yahoo!, as it seeks to reshape itself. In that note, Yahoo! has acquired dozens of smaller companies to help with that front, including names like Summly, Jybe, and the largest, Tumblr, which was purchased in May 2013 for $1.1 billion in cash and stock.
Read More: Has Marissa Mayer Done Enough?
Cantor Fitzgerald analyst Youssef Squali believes that of the 524 million Alibaba shares Yahoo! holds, 430.9 million are still held in Hong Kong, which could boost Yahoo! share prices. "Assuming no capital gains tax on Hong Kong-held shares (pre-US repatriation tax,) we estimate there could be $10-15/share of additional upside to our $42 DCF-derived PT," Squali wrote in a research note.
In the second quarter, Yahoo!'s core business decelerated to $1.03 billion, down 3% year over year, as weakness in the display unit dragged down the modest growth seen in the search portion of Yahoo!. Mayer has reiterated that the company will continue to be acquisition, having previously mentioned "strategic acquisitions," and some tuck-in acquisitions, as Yahoo! has done in the past.
A look on Mergerize, a social platform for making merger and acquisition predictions, shows Yahoo! is expected to be quite active acquiring companies in the next few years. Names like Pinterest, Yelp (YELP) , AOL (AOL) , Quora, Foursquare, and several others are mentioned, as the Sunnyvale, Calif.-based Yahoo! seeks to boost its core business, which includes search and display advertising.
Here are three areas where Yahoo! CEO Marissa Mayer may look to acquire businesses to boost not only the company's engagements, but revenue as well.