What Will Yahoo Buy With Its Alibaba Billions?

When Chinese ecommerce powerhouse Alibaba goes public in what is likely to become the biggest internet IPO ever, Yahoo will reap a massive cash windfall. The company is required to sell half its remaining roughly 23 percent of Alibaba.

Yahoo bought a 40 percent stake in Alibaba in 2005. The company was then worth $2.5 billion. Today it’s valued at more than $200 billion (but that ultimately will depend on the IPO). Thus Yahoo could stand to make up to $12 billion when Alibaba’s shares start trading publicly (before taxes).

When Yahoo sold its first batch of Alibaba shares, essentially half its interest, it made roughly $7 billion ($4.3 billion after taxes) — the majority of which was returned to shareholders. There will be significant pressure from institutional investors to do something similar this time.

Many people argue that Yahoo’s market capitalization today and the growth of its share price are essentially about its Asian assets, including Alibaba, and not about the core business, which has been flat. After the IPO, there will be mounting pressure on Yahoo CEO Marissa Mayer to grow the company’s advertising businesses.

Yahoo’s Q1 revenue slightly beat analyst expectations. But many financial analysts see the Alibaba IPO as the end of the “honeymoon period” for Mayer.

With a massive windfall coming, there are a couple of immediate questions for Yahoo: how much will return to investors and what will it do with the remainder? Let’s assume that Mayer can keep at least a couple billion for investment and acquisitions.

What or who will Yahoo buy? I had long ago speculated that Yahoo would and should buy Foursquare. However that did not happen. Yelp is too expensive.

The company needs to buy revenue, users or both — probably with an emphasis on mobile. Beyond future talent acquisitions, I could easily imagine the company buying a mobile network or ad exchange. The probability of this is high in my opinion.

Video and mobile video platforms in particular is another area where Yahoo is likely to look for usage and revenue. We’ll also see smaller ad-tech acquisitions.

Yahoo could make some “strategic” or splashy consumer-facing acquisitions. In that category, Pinterest would be an immediate, logical candidate. However the company has a nearly $4 billion valuation and undoubtedly sees itself heading toward a public offering.

Snapchat is another possibility. However that company also has a multi-billion dollar valuation and reportedly turned down eye-popping acquisition offers from Facebook and Google several months ago. Moreover Snapchat’s longer-term future is very unstable and uncertain.

I come back to Foursquare, which might cost a billion (or so). In addition to millions of users and local-mobile content — currently a significant hole for Yahoo —  the company would gain search technology and expertise, something Mayer has been developing internally. However there are also arguments against buying Foursquare, based on the notion that its growth has peaked.

An intriguing but relatively unlikely possibility is local search and directory publisher YP, which has developed a significant mobile ad business. However there’s a very different culture and big headcount that comes with it. On the flip side, Yahoo would gain a direct local salesforce of several thousand reps. Still it strikes me as quite unlikely.

I could go on and on speculating. But tell us what your thoughts are about where Yahoo should or is likely to spend its Alibaba billions.