Top 5 M&A Ideas That Could Reinvent Yahoo

| About: Yahoo! Inc. (YHOO)

Marissa Mayer is one of the more talked about CEOs in the tech world, but she has her work cut out for her. Yahoo (NASDAQ:YHOO) used to be the company that Google (NASDAQ:GOOG) wanted to be, but it's lost a lot of its shine. Yahoo's market cap is about $20B with a P/E of 5, against Google's $200B and a P/E over 20. So it's obvious that the market thinks Google has much better growth prospects, even though Yahoo's stock has outperformed Google's in the last year, and ties with Google's over the last two years.

How can Yahoo catch up? How can it once again become an exciting, innovative company? How can it spurn its revenue growth? Mayer is doing plenty to make Yahoo an exciting place to work, a place that attracts the best engineers and retains them. By all appearances, that's too little too late, and in order for Yahoo to reclaim its place in the sun it'll need some inorganic growth strategies. Mayer has publicly said Yahoo is looking for M&A targets, and she knows that that is the only way she has a chance of still being CEO of Yahoo in two or three years from now - namely, if she takes some big bets that pay off. The sale of Yahoo's stake in Alibaba has put several billion dollars into Yahoo's war chest. So here are our five favorite ideas for acquisitions by Yahoo that we think could help turn that ship around and keep Marissa in her job:

1. Tumblr: Tumblr is great in every way but one. It makes no money. According to one recent article Tumblr is 'feeling pressure to build a business.' No kidding! Rumor is that last round was under but close to $1B valuation, but if the Tumblr folks know what's good for them they should accept a lot less today. Their last round was before the FB IPO, and before Zynga (NASDAQ:ZNGA) and Groupon (NASDAQ:GRPN) imploded. Tumblr would bring Yahoo over 77m blogs, and Yahoo has a reasonable chance of managing advertising and commerce on and through the Tumblr community. Yahoo could acquire Tumblr, give VCs a decent return, and bring about 80m avant-garde content generators back within the Yahoo fold.

2. Trefis: Yahoo! Finance still gets about 30 million hits per day, and it's still a better product than Google Finance. Yahoo can maintain finance supremacy by adding a site with a social-media twist, because of user-generated content. The best finance site which utilizes people as their main source of content is Trefis, which has built up an impressive 115,000 unique visitors per day. Even more impressive and important is the direction. About a year ago, they were averaging 40,000 per day. That's considerable growth and a fine demonstration of the value of the crowd's opinion in the financial sector. Trefis' is the only site using crowd sourcing technology to value stocks (Estimize is another interesting play in this space - it crowd sources earnings estimates, also known as Whisper Numbers). This keeps users active and, through a snowball effect, adds new unique users every day. This is also a very cheap site to maintain. Trefis has received $2 million in funding thus far, which means investors can see a great return on investment with any reasonable acquisition price.

3. Automattic: This is the company that owns Wordpress, Curverider, Gravatar and more. One blogger has suggested that Yahoo should be a platform company - connecting audiences and content creators. Automattic, specially WordPress, rather like the Tumblr logic above, would provide Yahoo with a massive group of active content generators. Automattic reportedly has sales of about $50M, and would have a sub-$1B valuation for an acquisition that could really transform Yahoo.

4. Quora: At its last round Quora was valued at $400M, leading to a debate on Quora as to the value of Quora. Putting that fun aside, Quora is potentially disruptive to the online knowledge community. Something between Wikipedia and Yelp. Its users are largely techie types and integrating with Yahoo products could make it very interesting indeed.

5. Yelp (NYSE:YELP): Mayer was VP of Google Local, so she knows all about Yelp. Yelp has already rejected a $550m offer from Google, and a $1B offer from Yahoo, apparently at the insistence of Yelp CEO Jeremy Stoppleman. But that was when Yelp was private. It's public now and he doesn't have that power. Yelp has lost 66% of its value in recent months and still hasn't turned a profit. Its market cap is a little over a $1B now.

Disclosure: I am long GOOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.