Is Yahoo Really Worth More Than Microsoft Offered?

Yahoo’s (YHOO) stock had been declining steadily for almost two years before Microsoft (MSFT) showed up with Mad Money, yet the Internet portal thinks it’s worth $40 a share. Fact, or a case of corporate delusion? I think it’s the latter. Why is it worth $40 a share? (Is it because Microsoft offered $40 a share for Yahoo earlier, and Yahoo never took the offer and now are banging their head against the wall?)

Last time Yahoo traded at over $40 a share was back in January 2006. Now I am not against the idea of Yahoo squeezing more money out of Microsoft, as long as Yahoo can make a good case for it. Still, a 60 percent premium isn’t enough for Yahoo’s investors such as Bill Miller of Legg Mason, a mutual fund company. In a letter to investors in his fund, he writes:

Our own valuation work puts the value of YHOO in the range of those reported numbers, though, and we think MSFT will need to enhance its offer if it wants to complete a deal. YHOO shares were recently trading at a four-year low, and the stock averaged above the current offer price for all of 2004. YHOO is a uniquely valuable asset, and we expect MSFT will do what it takes to acquire it.

I would love to see Miller’s valuation work on Yahoo. Call me cynical, but there is a reason the stock is trading at a four-year low. Of course, this is the same fund that has big positions in stellar performers like Countrywide Financial (CFC), eBay (EBAY) and Sprint Nextel (S). Many Wall Street analysts think Yahoo is worth between $34 and $35 a share. And that is the best case scenario, and assumes that everything will go right for the company in the display advertising business. Gee, I wonder why Google (GOOG) is spending over $3.1 billion trying to buy DoubleClick?

I think Yahoo is suffering from a case of corporate delusion. The company’s litany of woes is so long that it’s going to take some time before the proverbial sun will shine on Yahoo’s cow patch in Sunnyvale again. People seem to have already forgotten some of the problems that showed up in the fourth quarter of 2007 (not that they’ve been resolved), such as:

• Yahoo’s search revenues slowed down after growing for four straight quarters.
• Yahoo used to get paid by the broadband providers, but now it will have to pay them a piece of the advertising action. That will result in between $150 million and $200 million in lost fees in 2008. This was presented as a positive, but getting paid isn’t the same as paying. (AT&T (T) and BT (BT) are offering between $300 million and $400 million as upfront payments, while Rogers will pay $50 million.)

And look at yesterday’s layoffs. After sending out an email thanking the troops for sticking by the company, Jerry & Co. cut about 1,000 jobs. Nice morale-boosting move. Memo to Yahoos: Jerry-atrics are as likely to shank you as the Barons of Redmond.

There will be some of you who might accuse me of being too hard on Yahoo, and perhaps I am. But it is hard to have empathy for a company that has consistently managed to underperform. It has been losing the talent that made it great. More importantly, there seem to be very few reasons to catalyze growth and a better future at Yahoo.

And if Microsoft wants to pay a 60 percent premium for this kind of a future, that’s a pretty good deal.

By the way, if you want to catch up with the roller coaster of the Yahoo-Microsoft showdown, Kara Swisher has a nice wrap-up today, while Michael Arrington is reporting of talks between Yahoo and News Corp.

Comments

[iQon:]

Yes, I agree, MFST's, go-at-it-alone, internet stragegy is long over; why? Because when MSN was launched, MSN, was launched as a free service, totally, never, really depending on ad revenue to strive, and grow.

MFST is adapting a strategy of ' Residual Growth, ' which is what Yahoo provide through the online deal with AT&T. Along with MFST's proactive strategy of hand held devices now, since iPod, the Xbox is poised to reap the benefits of Yahoo's enormous following, free-membership, because MFST, nor, Yahoo, engage in internet connectivity, where the revenue is generated in a residual fashion, and does not necessarily depend on external economic situations as much as Google's strategy. As time goes, Google, will be much more dependent upon ad revenues which means Google's dollar per person costs will rise inorder to maintain ad sponsorship. The strategy MFST is persuing, allows a freeier cash revenue/profit build up, only if executed correctly. Increased profit margins through residual income.

Yahoo has brokered a deal, and I mean a very successful deal with the recording industry; where, all parties involved share the revenues. Revenue sharing strategy of Yahoo! Excellent stragegy. In the long run, Yahoo's stragegy is going to be more successful among Yahoo, Google, AOL, and currently, MSN,.

Yahoo does not depend on ad revenue to survive as much as MSN, Google, AOL, and television! Yahoo is built around brand loyalty, word of mouth, and total entertainment value added sentiments to the customers lives, and end user interaction; I know, I'm an adamant Yahoo user.

MFST, and Yahoo(Yhoo!) is a very good strategy, because it as well slide under the radar of creating a monopoly with in Microsoft's window divisions.

I do not know if Microsift(MFST) should raise the bid. I would, if I was on the board of Microsoft. I would conduct a simple (NPV-ft) net present value of future cash flows equation; which, I know Steve Ballmer already knows due to his cost accounting skills along with his CFO.

Microsoft has one other option that will and can allow Yahoo, and MSN's internet strategy to flourish; provide computer usage time in an internet cafe style, selling unrestricted, time wise, or ownership to actual computer access.

This is a magnificent merger strategy, business plan, because, the plan creates residual revenue growth for Microsoft, and now Microsoft has a more stable revenue stream instead of having to always create new products to earn and grow revenues; the company, share holders value!

iQon!

2008 Feb 13 03:33 PM

[iQon:]

Yahoo/AT&T deal information suggests other wise.


News analysis A new kind of Internet portal war is brewing as broadband providers begin flexing their muscles to renegotiate more-favorable deals with large Internet brands such as Yahoo and Google.

Last week rumors were flying that AT&T was unhappy with its existing broadband portal deal with Yahoo. And this week, The Wall Street Journal reported Comcast wants a bigger slice of the revenue pie in its deal with Internet search giant Google.

AT&T and Yahoo have downplayed the rumors, saying they are actually expanding their relationship. Meanwhile Comcast and Google remain mum on their deal, but insiders say that Comcast is re-evaluating the Google partnership as part of a broader deal it's considering to add advertising to its Web site.

Whether AT&T eventually splits from Yahoo, Comcast ditches Google or neither of those possibilities comes to pass, one thing is clear: broadband penetration has changed the game, and new Internet power brokers are emerging, making it necessary for players to renegotiate deals made only a few years ago.

"ISPs have always faced a challenge when it comes to attracting customers to their portals," said Joe Laszlo, an analyst with Jupiter Research. "But they are bringing more to the table today in terms of subscribers and their own content, so I think naturally there is some rebalancing going on. But I don't think it's a traumatic thing; just an evolution in the relationship with the Internet companies."

As more advertising dollars move online, broadband companies see a big opportunity. For the last couple of years online advertising has grown about 30 percent year over year, according to the advertising and marketing research firm eMarketer. The increase in spending comes as more advertisers shift away from placing ads in traditional media and spend more to advertise online.

But most of the advertising spending is concentrated among the top four Internet portals--Google, Yahoo, MSN and AOL--according to eMarketer. Google alone captured about 25 percent of the overall online advertising dollars spent in 2006. In 2007, eMarketer projects, two-thirds of the $19.5 billion expected to be spent online will go to those four big Internet companies.

"As more traditional advertisers shift their budgets toward online, they're more likely to spend that money on traditional online companies, such as Yahoo and MSN," said David Hallerman, senior analyst at eMarketer.

Still, the opportunity to make money from advertising is there, and broadband providers want a piece of the action. Comcast started experimenting with advertising on its portal about nine months ago, and the company is looking to expand its efforts. It already has a request for proposal circulating among Internet companies to find a suitable partner to help attract more advertising dollars.

What's in a portal?
Since cable operators and telephone companies first started selling high-speed Internet services, they wanted to offer more than just dumb pipes delivering access to the Internet. They wanted to provide a reason, beyond simple speeds and feeds, to keep customers loyal to their services. Developing a Web portal or home page for direct interaction, where they could showcase other services to existing customers, became an important element of their strategies.

"(ISPs) are bringing more to the table today in terms of subscribers and their own content, so I think naturally there is some rebalancing going on."
--Joe Laszlo
Jupiter Research analyst Some companies, such as Comcast, built their own portals and partnered with big Internet companies like Google only for certain features, like search. Others, such as AT&T and Verizon Communications, partnered with existing giants to offer co-branded services that included premium content that users couldn't get on regular Web portal sites. AT&T, then SBC Communications, struck an exclusive deal with Yahoo. Verizon took a multipartner approach, signing contracts with AOL, MSN and Yahoo. Its co-branded AOL site will launch later this year.

At the time most of these deals were struck, companies like MSN and Yahoo had more clout with consumers when it came to the Internet than did phone companies or cable operators. As a result, some deals likely favored Internet players more than broadband providers.

That appears to be the case with AT&T and Yahoo, which struck their deal back in 2001. According to news reports, AT&T actually pays Yahoo to allow its subscribers to access Yahoo's content. Some estimates are that Yahoo makes as much as $250 million annually from the AT&T deal.

Meanwhile, Google has been paying some of its partners, such as Dell and News Corp., to use its search engine. Google has promised to pay $900 million in advertising revenue to News Corp. for putting its search engine on MySpace. Comcast is also getting paid to use Google's search engine, although some say Comcast wants a bigger cut of the advertising revenue.

Published: March 20, 2007, 4:00 AM PDT
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But the Internet is changing, and broadband providers have more reasons today to demand better partnership terms than they did earlier. For one, broadband penetration is now more than 50 percent in the U.S. And with all the consolidation that has happened in the cable and phone industries over the past few years, more subscribers are customers of fewer providers.

For example, at the end of 2002 Comcast had 3.6 million high-speed Internet subscribers. By the end of 2006, it reported a total of 11.5 million subscribers. With its acquisition of BellSouth, AT&T has become the largest broadband provider, with more than 12 million high-speed Internet subscribers.

What's more, consumers are starting to buy bundled packages of services from a single broadband provider. Not only does this encourage loyalty, but an integrated portal makes more sense for subscribers who want to access all their services from a single launch pad. Today, Comcast customers subscribing to high-speed Internet, digital voice service and cable TV, can access their e-mail, telephone voicemail and TV guide from the Comcast.net portal. The company's upcoming wireless phone service will also be integrated into the portal.

The phone companies are planning similar integrations. While Verizon has co-branded portals, it's also developing its own portal, called Verizon Surround, which is focused on content affiliated with the company's high-speed Fios service. Like the cable companies, Verizon offers a triple-play package of voice, video and data services that runs over the Fios all-fiber network.

Later this year, Verizon will offer subscribers the ability to program their digital video recorders from the Verizon Surround portal. Comcast also plans to offer that capability later this year through Comcast.net.

The content connection
Another key reason why the balance of power may tilt slightly toward broadband providers is the existing relationship that they have with big media companies for video distribution. The cable companies, especially, have long-established relationships with huge media companies, since they've been the primary source of distribution for more than 30 years. Comcast already offers a larger catalog of video-on-demand titles, some of which can be accessed from its Web site.

Verizon is also starting to bulk up its own portal with video content from deals it has struck for its TV service, which will eventually allow Verizon subscribers to view and access content from any kind of device, said Bill Heilig, vice president of consumer broadband product management at Verizon.

Meanwhile, Google is embroiled in what could be a multibillion-dollar lawsuit with Viacom, one of the largest media companies in the world. Google, however, has also successfully negotiated licensing deals with many entertainment companies, including Warner Music Group, CBS, and most recently, the BBC.

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Extra: Don't let your mind get away with anything Experts say that large Internet companies do still wield a lot of power, especially since usage on their branded Web sites far outpaces that of any phone company or cable provider. According to Nielsen/NetRatings, Yahoo and Google each had more than 107 million and 105 million unique visitors, respectively, to their Web sites in February. Meanwhile, Comcast.net and all other Comcast-branded sites had only 14 million unique visitors. AT&T and Verizon Communications Web sites saw only about 13 million unique viewers each.

As a result, broadband providers, recognize that Internet companies are important partners. Because the Internet brand is very familiar to subscribers, it often helps keep customers loyal. Verizon's Heilig said he was surprised to see how much its co-branded sites reduced customer churn.

"People like the brand-name portals," he said. "I will be the first to admit that Verizon's start page isn't MSN, Yahoo or AOL."

But he added that as the market evolves, these deals will inevitably be revisited.

"I'm sure we will do a gut check in a year or two," he said. "Right now, the retention benefits are very material. But at some point the game may change, and we have the flexibility to change our plans.".....end of article.


Yahoo!, Microsoft merger is just what's needed in the internet world, and if Microsoft work on providing real time computer access, usage, in an internet cafe, college computr lab, only, in the public; Microsoft/Yahoo! combination can reach economies of scales rather quickly, and generate a bundle of free cash, and amassing enormous share holder's value to the company; let alone, adding significant value to the end user's lives.



iQon!

2008 Feb 13 03:52 PM

[Tom B:]

MSFT / YHOO would be a train wreck. If Yahoo can't make Yahoo a growth company, what chance does a crusty old-guard company with NO expertise in search, or advertising, or content have? I predict that by the time (1-3 years out) when the EU finished its antitrust review, all Yahoo's elite would be working for Google. And I will have changed my mail to GMail and my "home page" to news.google.com or something. I've kept it set to Yahoo for the past 15 years or so mostly out of habit. Yahoo's page has actually gotten uglier over the years-- stupid menus that move when you try to click.

2008 Feb 13 04:21 PM

[Turley Muller:]

Yahoo put it in the ditch, and I don't know is MSFT can get them out. They're pretty much in th ditch too, as far as I see it.

Yahoo owned the web. What real big improvements ar services, content etc, have they added recently, or past 5 years.

In the time Yahoo took to spiff up the finance page,
Google has built an BA search engine, plus endless amounts of other great tools and services, creating new ones all the time. Being facetious, but can MSFT turn yahoo around??

I think it's the blind leading the blind. I think yahoo could be worth a 100, to they right firm that can fully capitalize the brand, but I don't think MSFT will be able to wring 40 dollars of value of them

2008 Feb 13 05:23 PM

[mkreisel:]

If MSFT does not acquire YHOO, both are lost. If MSFT acquires YHOO, there is at least some hope. Steve Ballmer knows this and he will not walk away, neither can he afford to piss off Yahoo too badly.

2008 Feb 13 07:09 PM

[fxtrader07:]

@mkreisel: interestingly, yahoo's mgmt doesn't care at all. keeping their jobs seems their premier occupation these days and greedy shareholders follow in blind faith, all the well-documented disappointments notwithstanding
what a joke

2008 Feb 14 04:41 AM