Could An Alibaba Buyout Send Yahoo Higher?

One of the biggest market stories in the last month has been the successful IPO at Alibaba BABA, which raised a massive $21.8 billion in its public market introduction.  This is the largest tech IPO we have ever seen and this suggests a strong wave of bullish optimism with respect to the lower end retailers in emerging markets.  So far, this has failed to translate into assets like the iShares MSCI Emerging Markets Asia ETF EEM, which is still trading near 3-month lows.  But going forward this might not be the case for specific stock names (like BABA) which are still well-positioned for relatively stable growth. 

One factor that supports this argument is the prospect for potential buyout proposals directly focused on Yahoo! YHOO.  When we look at the tech giant’s long-term revenue performances, earnings growth has been relatively flat over the last decade as Yahoo continues to lose traction in the digital advertising space relative to counterparts like Google GOOG.  These trends have generated some critical questions for those invested in the company, and the latest news from Alibaba increases the likelihood that the relationship between these two companies could strengthen -- either as an increased partnership or in an outright buyout of Yahoo itself.

(Chart Source:  CornerTrader)

The next question investors should be asking is whether or not a buyout move would be beneficial for Yahoo.  The stock has seen some significant gains over the last few months, rallying from the lower $30s to hit highs above $43 as CEO Melissa Mayer continues to implement buyout strategies of her own.  But Yahoo stock is only now trading back toward its 2006 highs and many analysts have made the argument that Yahoo’s lackluster performances in areas like display-ad revenues mean that the company is still in need of a major overhaul at the upper levels.  Last quarter, this metric showed a drop of roughly 7% in Yahoo’s earnings report.  So it’s not entirely surprising to see another groundswell of support for further changes at the leadership levels. 

Does this mean that Yahoo is one of the market’s weak gazelles just waiting to be eaten by the young Alibaba lion?  Not if we believe the argument that Alibaba is simply not in the position to guide managerial decisions in a company that is as diverse as Yahoo.  But it does mean that this will continue to be an important factor that could affect positioning for those invested in YHOO.

Most of the public commentary from Alibaba CEO Jack Ma suggests that a buyout like this is unlikely but there is still enough rumor and speculation active within the market to change some of these expectations for those invested in Yahoo. 

Of course, the specificity of any such move would also depend on external factors that can be found in the macro arena, as well.  For example, trends in the US Dollar itself can be used as a way of determining whether or not it is likely Alibaba would feel confident enough to pull the trigger and make an actual buyout proposal for Yahoo.  In trends that have been confirmed by recent market analysis reports from BestCredit, one of the best ways to monitor activity here can be found in the PowerShares DB US Dollar Index Bullish ETF UUP, which tracks the performance of the US Dollar against its most commonly traded counterparts.  So it will be important for investors to remain cognizant of macro trends as one way to determine whether or not external factors could support such a move. 

For these reasons, tech investors with long exposure in names like Yahoo! and Alibaba will need to remain mindful of public commentaries released by Mayer and Ma, as this could be the best indicator of where these stocks might be headed long-term.