Yahoo Should Boost Y! Japan Stake Over 50%

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The fastest way for Yahoo (YHOO) to step revenue growth would be to acquire a controlling stake in Yahoo Japan, Bernstein Research analyst Jeffrey Lindsay proposes in a research note Friday. And he says that given the weakness in the Japanese market, the timing for such a transaction is near optimal. “We appreciate that there are covenants and understands dating back to the co-founding of the companies, but in our view the prize of being able to fully consolidate Yahoo Japan’s revenues and earnings is well worth a fight,” he writes. At the moment, YHOO holds a 34.8% stake in Yahoo Japan; Softbank has a 41% stake.

Lindsay noted in an interview with Tech Trader Daily Friday that Yahoo wouldn’t need to buy the whole thing; they would simply need a majority stake. He calculates that the company would only have to buy another 17% stake in the Japanese affiliate, which he figures would cost about $2.7 billion.

Lindsay also thinks the company needs to beef up its presence in Europe, where he notes that the company has basically ceded the paid search market to Google (NASDAQ:GOOG). He notes that the company already has a massive user base of Yahoo Maill users in Europe, and has a significant presence in the U.K. and Ireland.

Meanwhile, Lindsay joined a growing chorus of analysts who see signs of stabilization in the company’s business. He raised his 2009 EPS estimate on the company to 34 cents, from 30 cents; for 2010 he goes to 42 cents, from 35 cents. Lindsay also boosted his target price on the stock to $18, from $13.

Lindsay writes that the higher estimates reflect improvement in the paid search market near-term, and an eventual pick-up in the display advertising business.

On the other hand, Lindsay says recent statements from Yahoo CEO Carol Bartz make it appear unlikely that the company will do a deal with Microsoft (NASDAQ:MSFT) this year. He believes Bartz has persuaded the Yahoo board to give her time to improve Yahoo’s operations. But he also thinks that pressure to explore transactions will resurface in 2010, and that the board will eventually force Bartz to reconsider.

Lindsay still thinks that a deal with Microsoft would be the best options for holders. He puts the value of YHOO shares at $18 as a stand-alone company; $22 in a search outsourcing scenario; and $27 in a straight takeover of the company.

On the cost-cutting front, Lindsay contends Bartz is missing an opportunity by not being more aggressive: he thinks Yahoo could cut at least another 3,000 jobs without any noticeable impact on performance.

YHOO Friday closed off 1 cent, or 0.06%, to $16.64.

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