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After the Alibaba IPO, Is Cash-Gorged Yahoo a Buyer -- Or a Seller?

Can Yahoo CEO Marissa Mayer make it rain? Or will she get soaked?

What would you say about an Internet company that is now sitting on upward of $35 billion in cash and relatively liquid assets that still has one of the largest audiences in the Web?

And what would you say if that core business were now worth only about $6 billion? To put it in context, that is a fraction of LinkedIn’s $26 billion market cap, Netflix’s $27.5 billion valuation and just a little bigger than much tinier players like Groupon ($4.7 billion) and Yelp ($5.5 billion).

And what would you say if that company’s value was slashed in half in a single day, as noted by the Wall Street Journal and others, due to the IPO of another company that it holds a very large stake in?

You’d say: Welcome to Yahoo on Monday morning, just after the Alibaba Group IPO on Friday. The massive transaction, which was the largest tech offering in history, most definitely yielded the Silicon Valley Internet giant great riches.

But, according to numerous observers I have spoken to over the weekend, it also finally brought to the clearest light so far the great challenges the company faces as it finally has to define itself without the benefit of riding on the successful coattails of its now rich Chinese friends.

Yahoo shares are down almost five percent already today, an indication that investors have some deep concerns.

While its current 16 percent stake in Alibaba gives it a nice cushion, especially because Yahoo has promised not to sell those shares for at least a year, and could mean possibly higher trading value for shares of the Asian e-commerce giant, most are wondering what is in store for Yahoo in a post-Alibaba era.

“It’s going to be a very interesting fall,” said one top Yahoo exec to me with eyebrows raised high, referring to the next several months and making a clever sideways joke about the possible direction of Yahoo shares. “And it could go either way.”

Either way, the exec was talking about what numerous sources told me: Yahoo has become either a buyer of a very big Web property in order to spur its growth that still has not come in two years of energetic and often frenetic leadership of CEO Marissa Mayer or it has the possibility of becoming one of the tastier acquisition targets out there.

The first option — What Will Marissa Buy? — is one that has been much discussed on Wall Street, in Silicon Valley and in the media in the run-up to the Alibaba IPO.

Yahoo has already promised to return at least half of the proceeds of the Alibaba sale — a whopping $5.1 billion after taxes, after Yahoo sold about 122 million shares at $68 each — to shareholders, either via a dividend or a stock buyback. According to numerous investors I spoke with, they would prefer a dividend and many have told Mayer that they also want the entire amount, as well as any gains from future sales of the Alibaba stock sold, rendered up to them.

That makes sense, in many ways, because most are underwhelmed by the more than $1.5 billion Mayer has spent so far on a series of near-frantic purchases of a range of largely mobile and often troubled startups to goose Yahoo’s tech chops and add much-needed talent and innovative spirit for the company. Her most prominent acquisition — $1.1 billion paid for blogging site Tumblr — has been a mixed bag, although Yahoo touts it as being key to the overhaul of its content publishing efforts.

Whether Mayer will pay attention to this desire of shareholders is unclear. Whether she has to is also in question, given her entirely compliant board.

There have been numerous rumors that she has been on the hunt for a big advertising tech company over the last few weeks, for example, although Peter Kafka and I have ruled out most of the obvious candidates, such as AppNexus.

Such a purchase would not be much of a surprise, since Yahoo desperately needs to up its ad tech offerings and cannot build such capabilities in-house in a manner that would even remotely compete with Google and Facebook. Yahoo’s ad business has been on a steep decline, using all relevant metrics, although there have been some encouraging numbers recently from its native ad efforts.

Yahoo is also likely to look closely at content-focused companies of all kinds. While also unlikely, it certainly has considered companies like social content juggernaut BuzzFeed, sports, gaming, tech and smarty-pants online publisher Vox Media and social magazine Flipboard. There are lots and lots of choices in this space and many companies to choose from.

In a related arena, I am certain Mayer would dearly love to own scrapbooking phenom Pinterest, but its recent $5 billion valuation is pricey and other potential suitors — if the company was for sale at all — such as Google and Amazon would likely smoke any offer Yahoo could make. The same is true for the $10 billion-valued ephemeral messaging service Snapchat and any number of other high-growth startups. Despite its cash hoard, Yahoo cannot compete with many others in a bidding war for the good stuff.

The one acquisition that has persistently resurfaced is a Yahoo purchase of AOL, which never seems to die as a rumor. In all my checking of numerous sources, this is not in process and such a deal seems just a fervent hope of CEO Tim Armstrong. Previously, Mayer has expressed distaste for such a transaction, although that certainly could change as there are some sensible reasons for such a merger around ad tech and content. On the flip side, many feel that it could also create the biggest white elephant of the Internet.

Of course, such big purchases will put Mayer under an enormous amount of pressure to finally show some sort of significant performance from any acquisitions she makes. So far, she has not and this will certainly weigh on whatever comes next.

So much so that many in the investing community — including hedge funds and private equity firms — are beginning to revive the idea that Yahoo is perhaps a great takeover target now given its huge trove of cash and other assets and the massive discounting of its core business.

In this vein, there are any number of scenarios. The most interesting, of course, is that the tail finally wags the dog and Yahoo is bought by Alibaba. It’s certainly an intriguing idea and one that its founder Jack Ma has considered before. But, at this moment, given the importance of the company to not make a whole lot of public waves due to its foreign ownership and a need to focus on its own core business, this deal seems unlikely.

In an interview when asked about a possible Yahoo acquisition, Ma told Bloomberg: “I don’t know if they would sell. I think the very important thing is that we want to build up a company, not buying company.”

Also raised was the possibility that SoftBank — which owns a large chunk of Alibaba too, as well as of Yahoo Japan — could make a play for Yahoo. Former Google exec Nikesh Arora, who once worked with Mayer at the search giant, was recently hired to run its Internet and media business. He and its SoftBank leader Masa Son have to be thinking about grabbing a cheap Yahoo, if only to get his hands on more of Alibaba stock.

In fact, CNBC’s Carl Quintanilla asked just that of Son last week:

QUINTANILLA: PEOPLE SAY IF YOU WANT TO OWN MORE ALIBABA YOU CAN JUST BUY YAHOO AND THEN YOU WOULD OWN ALMOST HALF.

SON: I SHOULD BE CAREFUL HOW TO MAKE A COMMENT

Careful indeed, given SoftBank was one of Yahoo’s first funders when it was a startup. Plus, its efforts to expand in the U.S. telecom market have attracted a great deal of scrutiny.

Other buyers for Yahoo could include a range of private equity players who would want to unwind its assets and run the still-profitable business by cutting its costs (many think that Yahoo has too many employees in light of its current lack of growth) and milking its myriad of properties.

That, of course, would amount to the Web equivalent of a fire sale, which seems to be counter to Mayer’s goal of bringing Yahoo back to its former glory. She may still be able to, but now that Yahoo is finally out from under the stock-protective Alibaba umbrella, it will be interesting to see if Mayer can make it rain herself.

That or get soaked.

This article originally appeared on Recode.net.

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