With Its Chinese Cash-Cow Shrinking, Yahoo Should Go Gambling

Yahoo CEO Marissa Mayer and Tumblr founder David Karp pose for a photo during an annoucement that Yahoo acquired the Tumblr blogging site, in New York, May 20, 2013.
David Karp, the founder of Tumblr, with Yahoo CEO Marissa Mayer. Photo: Emmanuel Dunand/AFP/Getty Images

As a tech executive, it’s not every day that $10 billion falls into your lap. But that’s what’s about to happen to Marissa Mayer, the CEO of Yahoo, when the Chinese e-commerce giant Alibaba starts trading.

When Yahoo co-founder Jerry Yang bought 40 percent of Alibaba for about $1 billion back in 2005, it was one of the best gambles in tech history. Alibaba grew from a scrappy start-up into a massive conglomerate — a cobbled-together combination of Amazon, Paypal, eBay, and various other services that could be worth as much as $200 billion when it goes public later this quarter — and Yahoo has seen the value of its stake skyrocket. Now, as Yahoo prepares to sell the 9 percent of Alibaba it’s required to get rid of in Alibaba’s IPO, Mayer will have to decide how she’ll use the resulting $10-20 billion payout.

Here’s an idea: Perhaps Yahoo should give up on its core business and go high-stakes gambling instead.

Turning Yahoo into a corporate casino might seem like an odd solution to the company’s problems, but consider the context: Mayer is two years into her reign as CEO, and despite piles of good press and a still-profitable ad division, the company’s core business is still hurting. According to investors, in fact, it’s worth less than nothing. (Although, as Aaron Pressman points out, investors may just be applying a lower value to Yahoo’s foreign assets for tax reasons.) For several years, Wall Street has essentially viewed Yahoo as little more than an American proxy for Alibaba — with no way to purchase the Chinese giant’s stock, investors have resorted to buying Yahoo’s instead. And while Mayer has made some key changes — starting with a spree of about 40 acquisitions, including a $1.1 billion purchase of Tumblr — none of the additions has boosted the company’s bottom line by much.

Jump-starting “Core Yahoo,” as investors have taken to calling the stagnant parts of the company, may be impossible. Instead of continuing with a losing strategy, why doesn’t Yahoo take its Alibaba money, use it to open a venture-capital arm, and start plowing it into start-ups?

Yahoo is investing billions into start-ups already (mostly by buying them outright), but those acquisitions have been strategic, meant to improve the things Yahoo is already doing or add new, related capabilities. What I’m suggesting would be a more passive, speculative approach. With $10 billion or more, Yahoo could buy stakes in health-care start-ups, financial start-ups, transportation start-ups — any start-ups, really, whether or not they’re related to Yahoo’s existing business lines at all. Yahoo wouldn’t need to manage these companies or direct their strategies. (In fact, given Yahoo’s recent track record, it probably shouldn’t.) But Yahoo could profit to the tune of billions of dollars if any of these start-ups were to become huge.

Investing in the next big thing can completely change a company’s fortunes. Just ask Daimler, which was lucky enough to nab a 10 percent stake in Tesla before it went public. Or the Washington Post Company, which used revenues from its lucrative Kaplan education division to subsidize its money-losing newspapers for the better part of a decade. (Kaplan later cratered, which shows the risk involved in this strategy.) Yahoo wouldn’t be the only tech firm to branch out into speculative investing — Google, for one, has had a successful venture-capital arm since 2009 — but Yahoo could capitalize on its cash position and its brand name, which remains strong despite its Web 1.0 connotations, to fund a whole new wave of growing companies.

Betting big on companies that have very little to do with your core business might seem like odd strategy, but it makes sense in tech. Huge technological innovations usually come from small upstarts, not established mega-companies, which get lazy and saddled with bureaucracy as they age. And if you’re a cash-rich megacompany that doesn’t know what the future of tech will look like, it’s easier to hedge your bets by planting flags in a bunch of different possible growth areas. (Think of Facebook buying the virtual-reality gaming company Oculus, or Google buying robotics companies.)

Now would be a good time for Yahoo to hire some leading trend-spotters and investors, and go on another buying spree. Public tech stocks are in a slump, and founders are raising money out of worry that the end of a bubble is near. If Yahoo approached a few dozen innovative start-ups — probably foreign ones — and waved hefty term sheets in front of them, it might just work. Yahoo can’t afford $19 billion for a megaacquisition like WhatsApp, but $10 billion — or however much Yahoo reaps from Alibaba’s IPO, minus taxes — is enough to vacuum up stakes in hundreds of smaller companies. (For comparison’s sake, Google Ventures manages only $1.2 billion, and has invested in more than 220 companies.)

When she’s been asked what she plans to do with the Alibaba windfall, Mayer’s answer has been consistently conservative: “We intend to be good stewards of capital.” That’s a good plan if your existing strategy is working. But investors don’t want Yahoo to stay on course — in fact, given the value the market is assigning to Core Yahoo, they’d rather see it do just about anything else. And the upside for Mayer of turning Yahoo into a turbocharged investment vehicle could be bigger than the potential downside. If one or more of the investments became a huge success, she’d look like a genius. If they all flopped, the narrative would say that Yahoo was beyond saving anyway.

It can’t be fun to try to turn a huge, aging company like Yahoo around. And, to be honest, Mayer sounds like she’s getting tired of trying. (Watch her trying to convey enthusiasm for Yahoo’s upcoming slate of original TV shows in today’s TechCrunch Disrupt interview.) Unless she’s willing to make dramatic change, Mayer may have an excruciating next few years explaining, over and over again, why Yahoo is undervalued. And there’s no guarantee that investors will ever agree.

Yahoo’s core business may never reach its heights again, but it won’t have to if it can find and invest in the next Alibaba. Yahoo shareholders would get access to a whole slate of fast-growing private start-ups, and Yahoo could find a gem that reverses its slide. A good mantra in today’s cash-rich tech industry is this: You don’t have to build the future if you can buy it instead.

Yahoo Should Go Gambling