With Alibaba windfall, all eyes on Yahoo's Mayer

As Chinese e-commerce company on Thursday priced what promises to be a record-breaking initial public offering, the announcement starts the clock on Marissa Mayer's biggest test as Yahoo CEO.

Alibaba priced its shares at $68, according to the Wall Street Journal, which would bring in $21.8 billion when the offering takes place on Friday. That means Yahoo stands to make $8.27 billion before taxes thanks to the company's 22.6 percent ownership position in Alibaba. After the IPO, Yahoo will retain a 16.3 percent stake.

But the windfall also raises expectations for Mayer. Will she use the cash to revive the company's fortunes in a sustained fashion?

"There will be mixed emotions," said Sameet Sinha, an analyst at the investment firm B. Riley and Co. "Marissa will be happy, but there will be a lot of pressure."

It's been a tough slog so far. Since taking the company's helm more than two years ago, Mayer's burnished the brand with new excitement -- a not insignificant achievement given Yahoo's mediocre financial performance over the past decade. Under Mayer's regime, Yahoo's also bought more than 40 Internet-based companies -- including the $1 billion acquisition of the popular blogging platform Tumblr. Even though the acquisitions have yet to add materially to the company's revenues, the fact that high-profile young companies are now willing to consider calling Yahoo home constitutes a sea change in sentiment compared with the pre-Mayer era.

But the other side of the ledger tells another story. The company's revenues remain flat. What's more, Yahoo's clout in the digital advertising world continues to dwindle. For instance, last quarter, the company's display ad revenue -- an important financial metric -- slumped 7 percent.

During the company's last call with Wall Street analysts, Mayer acknowledged the disappointing performance and said management was dissatisfied with the results. She also attempted to set expectations as Yahoo courted new marketers to revitalize its ailing advertising business. "It will take a little longer than we originally forecasted," she said.

Yahoo declined comment for this story but the company's statements to date suggest that it's taking the increased attention stemming from the Alibaba IPO in stride.

"I don't think it's any different than what we've been feeling all along," Adam Cahan, Yahoo's senior vice president of mobile and emerging products told CNET in May, a few weeks after Alibaba filed for its IPO. "At the end of the day, the journey for Yahoo is the proof in growth. What we want to show the world is that we can return this company to growth."

After Yahoo sells 121.7 million of its shares in the IPO, the company plans to give at least half of the Alibaba proceeds back to stockholders. That still leaves more than enough for Mayer to make more acquisitions of smaller companies, picking up new talent and technology.

The company could also choose to make another splashy buy, in the same vein as Tumblr, though analysts and investors are divided on that approach. "We think that it's better for them to go bigger and bolder," said Scott Kessler, an equity analyst at S&P Capital IQ. Some shareholders, though, are worried about another big buy. "One of the fears investors have is that the money might burn a hole in her pocket," said Sinha. "And she might make some investments that have longer-term returns than they'd like."

Unsurprisingly, Yahoo has remained mum on the topic, with Mayer only telling analysts on a conference call in April that the company will be "good stewards" of the Alibaba capital.

'I can't operate around it'

As Alibaba strikes out on its own in the public market, its diminished role at Yahoo will shed more light on the health of the Yahoo's core products and advertising business.

For the past few years, Yahoo's stock has been propped up by excitement in Alibaba. Earlier this week, the stock spiked to $44. But that spike was more a reaction to Alibaba's decision to increase the size of its IPO than anything Mayer has done on the job. "Marissa will no longer have Alibaba as a shield to help her stock price," said Sinha. Yahoo's stock was at $42.34 in after hours trading on Thursday.

While the IPO will certainly bring a large sum to Yahoo, the company has downplayed its affect on how Yahoo is going about its business. "Alibaba -- I can't operate around it," Cahan said in May. "So it's not something I really spend a lot of time on, to be honest."

What he does spend his time on is trying to make Yahoo's suite of mobile apps an attractive destination for users -- and advertisers. Cahan entered his role when Mayer put him in charge of a dedicated mobile product team in October 2012 -- one of the first major moves she made as CEO. Since then, she has grown the mobile engineer headcount from three dozen to more than 500. The company has also refreshed all of its mobile apps, including Weather, Sports and Finance, and introduced Yahoo News digest, a news reader that summarizes articles via algorithm.

Mayer has also been investing in several other areas where she hopes the company can gain some sort of traction. She's homed in on search, going back to the company's roots and developing core search algorithms. She's also made a big media push, hiring big name journalists like Katie Couric and former New York Times columnist David Pogue. The company has also ventured further into entertainment, ordering up premium TV content like the NBC cult favorite "Community" to compete with the programming of Netflix and Amazon.

With the Alibaba proceeds, she'll have more resources to tinker with finding the right strategy. And while Mayer is approaching a moment of truth, there's no doubting that the money is a welcome gift. "It's a pretty good position to be in," Kessler said. "It puts some pressure on here and her team, but most CEOs want flexibility."

Mayer summed it up in during an earnings call in July with a message to Yahoo's co-founder Yang, who orchestrated the Alibaba investment, as well as Alibaba co-founders Jack Ma and Joseph Tsai: "Thanks."