Does Microsoft's Bid Make Sense For Yahoo!?

Microsoft Inc.'s (MSFT) $44.6-billlon offer for Yahoo! Inc. (YHOO) seems to make sense for Microsoft, but does it make sense for Yahoo!?

That's the question thrown out there by Citigroup analyst Mark S. Mahaney in a note to clients weighing the merits of the deal.

From Microsoft's point of view, Yahoo! is an "obvious strategic choice" given its position as one of the top three Web properties worldwide, Mr. Mahaney said in a note to clients.

But put yourself in Yahoo's shoes, and the deal isn't quite so clear cut. On the one hand, the analyst wrote, the $31 bid represents a healthy 62% premium on Thursday's closing price, and value's Yahoo at 16 to 17 times its 2008 estimated value [EV] to earnings before interest taxes depreciation and amortization (EBITDA) based on $1.8-billion in EBITDA. Google, he added for context, currently trades at 16 times his 2008 EBITDA estimate of $9.9-billion.

On the other hand, if Yahoo wants to go it alone, it will need to make some significant changes to create comparable value for its shareholders. It has a few options at its disposal, according to Mr. Mahaney, the best of which might be outsourcing its search business to Google. He told clients he believes a deal of this nature would be at least 25% accretive to Yahoo!

Ultimately, should Microsoft's offer prove successful, Mr. Mahaney said the deal is unlikely to derail Google (GOOG) as the world's number one search engine anytime soon.

Long-term, a Microsoft-Yahoo! combination could pose a greater competitive risk to Google. But, near-term, we'd be skeptical that search users' overwhelming preference for Google would change.

Comments

[Tom B:]

"On the other hand, if Yahoo wants to go it alone, it will need to make some significant changes to create comparable value for its shareholders."

The shareholders who aren't interested in Yahoo's long term potential should have sold Friday.

2008 Feb 03 11:08 AM