Why Alibaba IPO Rings Alarm For Yahoo! Inc. (NASDAQ:YHOO) Investors?

The fresh bout of news that Alibaba has priced its initial public offering in between $60 to $66 a share might have taken Yahoo! Inc. (NASDAQ:YHOO) to an altogether new level, but the question remains as to how long this trend will continue. Over the last two years, Yahoo has recorded a twofold growth driven not by its fundamentals, but merely on account of its 22.4% stake in Alibaba. Till now Yahoo has successfully provided a window to its investors to monetize from the growing popularity of Chinese e-commerce giant, but that door is about to close now.

Running Out Of Time

The events will turn drastically for Yahoo! Inc. on September 18, 2014, when Alibaba will launch in the market of the U.S., thereby ending the role of Yahoo! Inc as a middle man. Perhaps, Yahoo itself is aware of the wind of change and had devised a short-term fix by announcing that it will part with 140 million shares representing 27% of its stake in Alibaba in the upcoming IPO.

The sale of the stake would fetch $5.7 billion to Yahoo, net of taxes and would keep the investors hooked to the company, but only till the time they have their share of returns. Yahoo would have to hold the remaining stake for at least a year and the prices of which would be more reflective of Alibaba’s direction of stock prices, but it will give only less returns to Yahoo investors over and above direct investors of Alibaba.

Plans Not Revealed

Amidst all the several possibilities, lay some challenges up ahead for Yahoo. Firstly, it will have to bear a substantial tax burden in case it wishes to monetize from the remaining stake. Though there are ways to avoid tax, but nothing has been clarified by the company. Secondly, Yahoo has yet to decide on how it will utilize the rest of the proceeds and based on the company’s recent behavior, another expensive acquisition could top the list. All this underscores that Yahoo should shift gears to its making its growth story, but until then Yahoo investors should stay on guard.