Skeptical of Blodget On Yahoo!

Yahoo! Inc. (YHOO) rose nearly 6 percent, or $1.41 per share, on Friday, sparked by comments by former Wall Street analyst Henry Blodget that the online Internet search company could be a takeover target for Microsoft Corp.

At a UBS conference, Microsoft (MSFT) division president Kevin Johnson said on Thursday that Microsoft plans to grow its search share from 10% to 30% and its online ad share from 6 percent.

"Buying Yahoo would give Microsoft 30 percent search share instantly. It would also boost Microsoft's ad share close to that 40 percent goal," wrote Blodget on his digital business blog, Silicon Alley Insider.

More than 28,000 and 23,000 December Yahoo! call options (with strike prices of $27.50 and $30 per share, respectively) crossed the tape on Friday. In contrast, less than 15,000 of the December put options (strike prices of $27.00 and $30.00 per share) traded on Friday.

Henry Blodget, once Merrill Lynch’s (MER) top Internet securities analyst, advised investors to buy Internet stocks through most of 2000. Evidence surfaced that Blodget had knowingly written biased investment advice giving favorable coverage to certain Internet companies, encouraging customers to buy or hold poorly performing stocks (which supported Merrill Lynch’s investment banking interests), while simultaneously dispatching e-mails deriding as “junk,” “crap,” and “a disaster,” the same stocks that he had publicly rated at “buys.”

In 2003, he was charged with civil securities fraud by the SEC. He settled without admitting or denying the allegations and in April 2003, was fined $4 million and subsequently barred from the securities industry for life.

Blodget has been writing about Yahoo! for years. In March 2001, his research note on Yahoo! predicted the company might be about to offer an insight into its earnings, an announcement of restructuring, an acquisition or a decision to enter into a strategic investment. Whatever. As it happened, then-CEO Timothy Koogle was about to quit.

Blodget was half-right, as he so often was. The problem was it was impossible to tell which half, according to a Forbes article in 2003.

Skeptical scrutiny is the means, in both science and religion, by which deep insights can be winnowed from deep nonsense. ~ Astronomer Dr. Carl Sagan (1934 – 1996)

Silicon Alley Insider opines on its disclaimer page, “[investors] should be skeptical of any information on Silicon Alley Insider, because it may be wrong.”

I'm skeptical of banana trees
Cause they sway too much in the tropic breeze
I'm skeptical that the world is round
What keeps it up and what keeps me down
I'm skeptical that the sky is blue
But I'm not skeptical about you. ~ Kim Carnes (Skeptical Shuffle Lyrics)

Sorry. Given Blodget’s history of talking out of both sides of his mouth, and the failure of Silicon Alley Insider to disclose whether or not any of its columnists hold a financial interest in Yahoo! Inc., perhaps investors out to take heed of Blodget’s own advice—and be skeptical of any information published on his blog.

Author David J. Phillips does not hold a financial interest in Yahoo! Inc. The 10Q Detective has a Full Disclosure Policy.