Who Will Be Yahoo's Most Likely Suitor?

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Includes: AAPL, GOOG, LNKD, MSFT, YHOO
by: Brian Nichols

Yahoo (NASDAQ:YHOO) fired Carol Bartz Tuesday, and it was just what the stock desired, as it traded with gains of more than 5% throughout most of the day. The decision looks good on the surface, as she was seemingly incapable of success within the Yahoo corporation. I believe Bartz's firing could be larger than it seems, as the company has given no real indication of future plans. This allows analysts, writers, and investors the opportunity to speculate into the company's future to decide what changes may occur.

First, a brief history: Carol Bartz was hired in January 2009. She took over at the lowest point of the company's stock, during the recession. Her reign as CEO did not reflect a large loss of company value, but she did not grow the company, and most feared the company was headed down the wrong path, with both the 3rd and 4th quarter guidance recently lowered.

In June of 2011 Chairman Roy Bostock voiced his opinions in regards to Bartz by saying, "the board is very supportive of Carol and the management team." Less than 3 months later, the board voted to fire Bartz and explore strategic options. Bartz informed employees she was leaving via a message sent from her iPad on a plane.

Most of this is known to Yahoo investors, but what's unknown is what will happen next. Investors obviously view the firing as a positive development, since the stock experienced such gains throughout the day. Is this merely a market reaction, or investors just trading on news? That's the sure way to post gains in this confused economy. I personally believe this news has not quite sunk in yet, and that this firing could be the beginning of a significant change at Yahoo.

The company has already said it will explore strategic options. But what does that mean? Does it mean the company is going to completely change management and start over? Does it mean the company is now on sale, or that Yahoo could be broken off and sold to the highest bidder? I believe the company will try to sell its assets, and since its assets equal nearly $15 billion, I am willing to bet the strategic option will be that Yahoo will be acquired at some point in the near future.

Yahoo has patents, assets, and virtually no debt; someone will see this company as takeover-worthy. But which company will pull the trigger? In 2008 Microsoft (NASDAQ:MSFT) offered to purchase Yahoo for $33 a share, nearly 250% of its current premium or a market cap of more than $41 billion. I am not about to imply that Microsoft would make this same offer again, but there must be something at Yahoo that Microsoft wants -- perhaps a patent or technology that could assist the company in the smart phone industry.

In addition, the two are both involved with Search Alliance, and I believe there could be other ventures where the Yahoo platform could assist Microsoft. I believe that Microsoft still has some level of interest in Yahoo, as its offer is only 3 years old. There could very well be a technology that Microsoft wants to explore that Yahoo could enhance, and at such a cheap price I would not be surprised to hear that Microsoft makes an offer at some point in the near future.

A few other companies that came to mind were Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), Facebook, and LinkedIn (NYSE:LNKD). My first thought was Google, but it would not make sense after considering its recent purchase of Motorola (NYSE:MMI) and the limited advantages that Yahoo offers in comparison to Google's platform. I think Apple could be a possibility, as it does not have a service such as Yahoo and I could definitely see it as beneficial to one of the company's upcoming ventures, possibly the iCloud. Apple could utilize Yahoo in ways that I am not wise enough to imagine, however the most innovative individuals at Apple could easily think of ways to benefit from a service such as Yahoo. But with the departure of Steve Jobs I find it unlikely that his predecessor would make such a huge decision for the company and take the chance of it not being successful. Apple is already well positioned for the next 3 years, and I do not believe its new CEO, who is following a legend, would make this kind of decision or spend billions to acquire a company such as Yahoo.

I believe the companies that could most logically acquire Yahoo, besides Microsoft, would be Facebook or LinkedIn. Once again, I do not have the mind of technology that the founders of these two companies posses. But when I think of what Yahoo offers and the dimension it could add to either one of these two companies, I begin to believe that this purchase would make sense. Facebook could easily afford such an acquisition and could utilize Yahoo in a way that separates the two companies, much like Zynga, yet the companies benefit from one another.

If LinkedIn were to purchase Yahoo, it would cost them a great amount of money that the company does not have, but it would add an entirely new dimension to what the company already offers. LinkedIn is a professional network that has already incorporated jobs, news, applications, and a questions section to better interact with your connections and learn from their experiences. Yahoo could add so much more, and LinkedIn could take what it wanted and make it a more comprehensive networking system for its users without sacrificing the current operations of Yahoo. It could bring LinkedIn or Facebook to an entirely different level of success where each would have patents to expand into new lines of business if they so desired.

When I read that Yahoo is going to explore strategic options, my first thought was that the company was going to sell. I believe it's the company's best bet, as there are many others that could benefit from its services, especially for the estimated price. The company made a huge mistake by not selling to Microsoft when it had the chance, and I hope the directors and shareholders have learned from their mistakes. The future of Yahoo is at risk, and management must make changes in order to succeed, because investors are running low on patience and the company is running low on options. Yahoo is a good product -- even an amazing one -- and I believe large corporations in technology feel the same way and could benefit from acquiring Yahoo. So the question remains: When will Yahoo sell, and who will be buying?

Disclosure: I am long GOOG.