Yahoo Has Not Yet Slipped Under The Radar

| About: Yahoo! Inc. (YHOO)

The failing health experienced by Yahoo! (NASDAQ: YHOO) has not slipped under the radar. It has been a topic of discussion since the company underwent changes in management and received demands from its shareholders for more drastic changes, such as an upheaval on the Board of Directors due to the underperformance of its shares over the last five years. Its climb back to the top could be difficult after this decline, but I am fairly encouraged by Yahoo!'s share price currently sitting at around $15. Now, I don't disagree with the opinion stating Yahoo! is a devastated company, however, Yahoo!'s balance sheet is not in the red and this could provide the management with the chance of a handsome return.

My strong recommendation for Yahoo! is based on three favorable possibilities. As we have been hearing for awhile, it looks like the company could be sold in a manner that profits its shareholders. Another possibility could be for the executives to either make an acquisition or sell off some of its assets, to move the company away from the predominance of being an internet marketing business, since it is obviously losing out to Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG). The third possibility has arisen because the former CEO, Carol Bartz, has been succeeded by Scott Thompson, and the founder, Jerry Yang, has given up his seat on the board. Management could set a new course creating a new vein of cash, by way of a dynamic business strategy, which would engage a new generation of customers and in turn, increase returns for its shareholders.

The serious difficulties that put Yahoo! in this position were sales issues, engineering failures, failure to tap into internet marketing and advertising sales, loss of the majority of search engine advertising, and an overall breakdown of development and innovation due to poor management. In combination with a rough start during the initial partnership with Microsoft (NASDAQ:MSFT) in 2009, Yahoo! ended up having trouble turning its search engine results into true pay per click advertising results. A very disappointing statement of performance did nothing to reassure shareholders that there would be a comeback for the company. In fact, total revenue for 2011 was 3% less than it had been for 2010 and the number of searches being performed had fallen by 4%.

Microsoft's partnership with Yahoo! seems an unlikely alliance after a failed bid by Microsoft to acquire Yahoo! in 2008 for almost $45 billion (which was over twice what the company was then valued at). At the time the idea behind Microsoft's bid was that the acquisition could revolutionize its web business by allowing it to make use of name branding marketing. This would have given Microsoft three main advantages: an inroad to the 500 million people who perform their searches on Yahoo!'s sites; an edge over its competition by taking over name branding with corporate marketers; and a better seat at the search engine table by combining the companies' standing against Google, who account for over 75% of searches. This was a very favorable bid for Yahoo!. However, the bid ultimately failed, even after Microsoft had increased its offer by $5 billion when Yahoo! demanded a raise of $10 billion total . The rejection of the bid was too much for Jerry Yang, leading to his resignation at the beginning of 2012.

After Yang's departure and Yahoo!'s continuing woes for its new management, I think the company is much more open to acquisition although, given the current market and the company's present standing, it can no longer expect the kind of offer it received four years ago. Despite that, the amount of cash on hand held by many US technology businesses should make Yahoo! and its 700 million unique visitors a year rise to the top of the list of possible merger acquisitions.

The possibility of restructuring the company by adding to it and cutting dead weight could be great and, combined with new leadership, could help brighten the outlook of its shareholders. Yahoo! has shed some of its non-primary technology areas and that will help lower costs going forward. It already has a strong working cash balance, a decent net worth, no ongoing debt to drag it down and it could easily look into making its own mergers or acquisitions.

It seems that prior to being offered the position as Yahoo!, CEO Scott Thompson held high positions with eBay (EBAY), PayPal, Visa's Inovant subsidiary and Barclays Global Investors. This prior experience makes him well suited to both technology and business, and strengthens the company's chances of finding ways to attract unique revenues.

It is this new management team that could make the difference by turning around Yahoo!'s fortunes and potentially allowing the company to expand. If it is successful, there could soon be a noticeable difference in multiples which are currently sitting at around 20X. The price of earnings to forward growth multiple is now 30% below its average since 2005 at 1.2X. The estimate of earnings per share is hovering around $0.80 for 2012 with an expectation of growth to about $0.95 during 2013.

It may seem like Yahoo! has a lot to overcome and this is not an unreasonable conclusion. However, any investor willing to take a bullish approach could see this company's management thrusting it forward and reaping rewards for its shareholders. The possibility of the potential outcome is large enough to justify holding onto shares at a price of around $15.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.