My advice for CEO Marissa Mayer: Use Alibaba money to make Yahoo a local commerce juggernaut

(Photo by Stephen Lam)

In just a few months on the job, it appears that Yahoo CEO Marissa Mayer has been slowly turning the tide of negative perceptions around the beleaguered company.

By no means has she righted the ship, but she has, for the moment, encouraged critics to hit the mute button. The latest move in her rehabilitation campaign came Tuesday when she closed a $7.6 billion deal that will allow Chinese search giant Alibaba to repurchase a substantial amount of shares Yahoo has owned since 2005.

This deal was in the works before she landed the job. But she may be the largest beneficiary in the short term. With a few extra billion dollars to play with, it gives her new opportunities for resuscitating Yahoo.

And I know just what she should do: Turn Yahoo into a local commerce juggernaut.

Local commerce remains the Web’s great white whale. It is an enormous opportunity. But no company has fully been able to capture it. The best way for Yahoo to do that would be to use the windfall from the Alibaba deal to quickly gobble up three high-profile companies that could become the foundation of a local commerce strategy: Groupon, Yelp and Foursquare.

These are the companies that have made the most inroads with local restaurants, shops, garages and other small business that represent the majority of advertising and commerce dollars but have still not made the transition to online.

Before I explain why this strategy makes sense, let’s review the details of what happened Tuesday.

Yahoo invested $1 billion in Alibaba back in 2005, but the relationship soured over the years even as the Chinese company grew. So talks began last year to reach some resolution over Yahoo’s 40 percent stake.

Three CEOs later, Yahoo finalized a deal Tuesday. Alibaba will give Yahoo $7.6 billion, which includes $6.3 billion in cash and $800 million worth of Alibaba stock. And it’s licensing Yahoo technology for another $550 million. The upshot: After taxes and fees, Yahoo gets $4.3 billion.

“The completion of the first stage of the Alibaba share repurchase represents a significant milestone for both Alibaba and Yahoo,” Mayer said in a news release.

Next, Yahoo plans to return about 85 percent of that after-tax money to shareholders, or about $3.6 billion. That will make investors even happier, in the short term, and buy Mayer more time to clarify where she wants to take Yahoo.

“With Marissa Mayer coming in there, it gave Yahoo a period of grace with everyone,” said Patrick Moorhead, founder of Moor Insights and Strategies. “But very quickly, they’re going to need to share a strategy for what they’re going to do and how they’re going to win in the marketplace with their employees, investors, the entire Yahoo ecosystem.”

That leaves Yahoo with $645 million to spend. Plus, the company has about $2 billion in cash and short-term liquidity.

And that’s where local commerce comes in. Rather than chasing something like search or social that is owned by someone else (Google and Facebook), local commerce remains wide open.

It’s also an area Mayer knows deeply. While Mayer was an early Google employee, and played a critical role in its design and functionality, her final years at Google were spent as vice president of local, maps and location services.

Convincing any or all three to sell would be tough. The biggest challenge would be cost. Groupon’s current market value is $3.07 billion. Yelp is currently worth $1.47 billion. Foursquare, which is still private, is reportedly valued at $600 million. That’s more than $4 billion, plus the likely need to pay a premium over these prices.
Still, pulling them together makes sense. Groupon has made inroads with its daily deals and local merchants. Yelp has built up a huge base of local merchant profiles and user-generated reviews. Foursquare has been a leader in location-sharing technology and check-ins.

Speaking with Eric Jackson, co-founder of Ironfire Capital, a large Yahoo shareholder, he was very excited about the local commerce idea.
“That’s almost one that I’d guarantee, in six months from now, that Yahoo is big in local commerce,” Jackson said. “It’s a big interesting area, no matter who is the CEO of Yahoo.”

Jackson likes Groupon and Yelp as potential targets. Moorhead, by comparison, felt that Yelp has evolved enough that it might offer enough in the way of daily deals without needing Groupon. In any case, local commerce is huge. Period. It’s an area Mayer knows. She has some money to play with, and some goodwill as well.

Now we’ll see whether she can provide the leadership to take Yahoo in a bold, new direction.