SAN FRANCISCO, Sept 19 — Yahoo! Inc.’s stake in Alibaba Group Holding Ltd has been the biggest driver of its shares for several quarters. For Chief Executive Officer Marissa Mayer, that’s likely to continue after the Chinese company’s initial public offering.

While Yahoo was slated to sell more than 121 million shares in the IPO, for now it’s hanging on to more than 70 per cent of its stake, keeping its rank as one of Alibaba’s top holders. In July, Mayer reduced the number of shares Yahoo planned to sell in the offering, and lockup rules limit further sales for a year.

Mayer, who has been trying to revive growth at the Web portal for more than two years, has depended on Alibaba to attract investors eager to own a piece of the e-commerce giant before the IPO. Until Yahoo says when and how it intends to unload the rest of its shares, the Sunnyvale, California-based company may keep benefiting from that stake even as its main business founders, investors and analysts say.

“It’s given her and the executive team just a lot more flexibility and options and time,” said Scott Kessler, an analyst at S&P Capital IQ. “There’s still a lot of work to be done.”

Some investors predict Yahoo’s stock will rally this year as holders continue to see it as a way to indirectly own Alibaba shares. According to bets by buyers of structured products, such as call warrants and knock-out certificates, shares of Yahoo may rise 65 per cent by the end of the year.

Sales slump

Already, Yahoo has risen 13 per cent in the past month and more than doubled since Mayer’s arrival in July 2012. Investors have mostly piled into Yahoo because of Alibaba—about two— thirds of the company’s value is tied up in the Chinese company on an after-tax basis, according to Kessler.

As Alibaba prepared for its IPO, Mayer has been trying to shore up Yahoo’s business. She has been acquiring startups and investing in content and services to woo more Internet users and attract advertisers.

So far, her efforts have failed to narrow the company’s widening gap in online advertising with Google Inc. and Facebook Inc. Second-quarter sales, excluding revenue shared with partner websites, fell to a less-than-projected US$1.04 billion (RM3.3 billion). Analysts on average estimate sales this year will slip to US$4.35 billion — — the lowest level since 2005, according to data compiled by Bloomberg.

Bigger focus

The disappointing results have made Alibaba a bigger focus for Yahoo, and Mayer has nurtured the ties between the companies.

“We really have appreciated our relationship with the company and the value they’ve delivered to us,” Mayer said on a conference call in July. The relationship “continues to get better and better,” she said.

At the time, the US company said it would sell fewer Alibaba shares in the IPO, cutting its planned sale by more than 65 million shares.

“It should give all of you a sense that we’re very, very strong believers in Alibaba over time,” Chief Financial Officer Ken Goldman said on the July call.

Alibaba’s IPO

Alibaba and its holders sold 320.1 million shares today for US$68 each, raising US$21.8 billion and putting its market valuation at US$168 billion. Yahoo’s take from its planned sale of 121.7 million shares would be US$8.3 billion.

The Hangzhou, China-based firm runs a group of e-commerce businesses that saw US$248 billion in transactions last year. The company’s sales growth accelerated to 46 per cent in local currency in the quarter that ended June 30, to the equivalent of US$2.57 billion—up from 39 per cent in the previous quarter.

Some current Yahoo investors say they’re happy to keep their shares in the US company instead of buying Alibaba, as an alternative way to invest in the newly public e-commerce company’s growth.

“You can go out and buy Alibaba, and, yeah, you can put them in your portfolio, but Yahoo’s got this stake and there’s value in that stake,” said Daniel Morgan, vice president of Synovus Trust Co, which owns more than 90,000 shares of Yahoo.

‘Discounted prices’

Ryan Jacob, who manages Yahoo shares as part of his Jacob Internet Fund, said he doubts he’ll buy shares of Alibaba, because his ownership of Yahoo already gives him a piece of the Chinese company—along with a stake in Yahoo Japan.

“With Yahoo, you’re getting a significant Alibaba stake and a lot of other assets for very discounted prices,” he said.

Sarah Meron, a spokeswoman for Yahoo, declined to comment for this story, as did Jim Wilkinson, a spokesman for Alibaba.

Yahoo’s stake in Alibaba came from an investment of about US$1 billion in 2005, and was trimmed in 2012 as the Web portal returned cash to shareholders. This kind of tie-up between larger companies isn’t typical for US investors, said Richard Sylla, a professor of economics and financial history at New York University’s Stern School of Business. Berkshire Hathaway Inc. and mutual funds tend to be more ideal investment vehicles, he said.

“It’s a bit more unusual in the US for a company like Yahoo to have a big stock position in another firm without sort of taking it over,” he said. “Usually, one firm buys another and they merge or something like that—but in this particular case Yahoo was acting a little bit more like a partner or a venture capital firm.”

Jay Ritter, a professor of finance at the University of Florida, expects shares of the Web portal to follow Alibaba’s while Yahoo owns the stake in the Chinese company.

“It’s unlikely that Yahoo is going to squander the value of their Alibaba shareholdings,” Ritter said. “Remaining Alibaba shares are a major asset of Yahoo that should only sell at a slight discount or slight premium to their market value.” — Bloomberg