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What Yahoo Should Do with Billions from Alibaba IPO: Invest in Video, Ad Tech

Yahoo stands to reap a windfall of $8 billion or more in cash after selling part of its stake in China’s Alibaba Group, which is launching the biggest U.S. initial public offering in history — and with the bigger kitty, Yahoo should pour more money into video and advertising technology, analysts say.

Not all the cash will stay in Yahoo’s coffers: The company said it will return about half of the proceeds to to shareholders. But that still stands to be at least $3 billion in additional cash, on top of Yahoo’s cash and cash equivalents of $4.3 billion as of June 30.

Yahoo should specifically bolster efforts to become an alternative video platform to YouTube, said Peter Csathy, CEO of investment and consulting firm Manatt Digital Media. “They should use that war chest to massively fund and significantly accelerate video differentiation efforts,” he said. Yahoo should endeavor to lure YouTube creators to its platform, establish its own differentiated programming and focus on mobile video consumption, Csathy added.

SEE ALSO: Alibaba Worth More Than Facebook, Disney, Comcast After Shares Soar in IPO

Yahoo also could be primed for acquisitions in the digital-video platform space. Last year, Yahoo launched unsuccessful bids for Hulu and video site Dailymotion. But that doesn’t mean there aren’t other attractive targets out there.

Indeed, Yahoo may possibly attempt another run at Hulu, according to Csathy: “Yahoo must make some kind of major splash, and Hulu could be that splash, although it would be an expensive one,” he said. With Hulu, Yahoo could become the go-to destination for premium broadcast on-demand and potentially even linear TV content — and develop an over-the-top service to compete with pay-TV bundles.

Others echoed the view that Yahoo needs to bulk up on video and advertising technology to compete with AOL, YouTube and others.

“I think that so long as Yahoo wants to remain relevant in the advertising business, they will probably need to deploy more resources towards ad-tech related activities on one hand and higher-quality video on the other,” said Pivotal Research analyst Brian Wieser. “That may or may not mean acquisitions of tech or content, but it’s probably inevitable,” he said.

But while ad tech is clearly an area Yahoo needs to focus on, don’t expect Yahoo to execute any large M&A deals — of $1 billion more — in the near term, according to Rosenblatt Securities analyst Martin Pyykkonen. Yahoo has said it isn’t interested in buying AOL, a deal that had been rumored to be in the works, although it’s possible that tie-up could still happen.

“We think one of the more likely (and needed) areas for M&A by YHOO that would still be somewhat larger than a tuck-in scope could be related to advertising technology and programmatic ad buying,” Pyykkonen wrote in a research note earlier this month. Both of those areas are growing quickly and are a factor in Yahoo’s reduced premium ad pricing power and “weaker advertising brand for large advertisers.”

The biggest M&A deal so far under CEO Marissa Mayer, Yahoo’s seventh chief exec since 2006, was the $1.1 billion purchase of blogging site Tumblr in May 2013. So far, that hasn’t resulted in much revenue. “We need to see more granularity on usage metrics and advertising revenue progress, specifically at Tumblr,” Pyykkonen said.

Other analysts say Yahoo should double down in the gaming space. “Microsoft buying Minecraft (in a $2.5 billion deal announced this week) is a great example of buying your  way into the future by buying a younger gaming platform,” said Forrester Research analyst James McQuivey. “Too bad Yahoo didn’t get to Minecraft first, actually, because there’s really nothing left in gaming that has that kind of youth appeal and is also sustainable over many years.”

In July, Yahoo amended its deal with Alibaba to reduce the maximum number of shares Yahoo is required to sell in connection with Alibaba’s IPO in the U.S., from 208 million shares to 140 million shares. Yahoo said it will distribute at least half of the after-tax IPO proceeds to shareholders.

SEE ALSO: Alibaba to Raise Nearly $22 Billion in IPO, Biggest in U.S. History

According to filings, Yahoo planned to sell 121.7 million of its shares in the Alibaba IPO, which would give it about $8.3 billion at the offering price of $68 per share. With the sale, Yahoo’s stake in Alibaba will drop from 22.4% to 16.3%.

The cash netted from Alibaba’s IPO comes after Yahoo raked in $7.6 billion in 2012 after selling about half its then-40% stake in the Chinese company. Yahoo netted about $4.3 billion in cash from that transaction, and returned about $3.65 billion to shareholders.

Mayer, under pressure from Wall Street to demonstrate growth in revenue and profits, has not signaled what the company may specifically do with the cash infusion. But she’s continued to point to video as a key area of the business.

“We have continued our focus on video with investments in unique premium content,” she told investors on Yahoo’s second quarter earnings call. Mayer cited Yahoo’s order of two original TV-length series, “Other Space” from Paul Feig and “Sin City Saints” from Mike Tollin, and its pickup of a sixth season of “Community” after it was canceled by NBC. “We are thrilled by the positive response from ‘Community’s passionate following and we are excited to welcome those fans to Yahoo,” she said.

But the consensus among Yahoo watchers is that to remain competitive, Mayer will have to open the checkbook even more.

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