Yahoo (YHOO) is providing investors a great opportunity to profit from an expected buyout of the company. Buyout candidates with strong assets and a willing board are great opportunities to speculate on a potential buyout. Yahoo fits that criteria with strong assets in Asia and a willing board. Recent reports show that Yahoo recently hired Allen & Company to find potential opportunities and field inquiries from potential suitors.
Yahoo's most prized assets are stakes in Yahoo Japan and Alibaba Group. Yahoo's stakes in both companies are what makes up a bulk of the current company valuation.
The stage is set for a possible bidding war to erupt for Yahoo. I understand that Yahoo is not in the same position it once was but Yahoo is still the second largest U.S. search engine with about 16% of the search market. In a market dominated by Google, many companies are looking for ways to gain an advantage to get back in the game to compete. I expect to see a lot of interest from the private equity groups.
Yahoo is doing well in display advertising with strong growth from EMEA and APAC, both markets realized growth of 20% or better. Display revenue grew 5% year-over-year in the second quarter bringing in $467 million. Growth was relatively flat in the U.S. Market. I believe this makes Yahoo an even more compelling fit for a strategic U.S. buyer that may be looking for growth in the Asian markets.
I expect Yahoo to fetch a premium of at least 20-30% from current prices. This would place the purchase price for the entire company at about $18 to $19 per share. Now there is a good possibility of a bidding war developing which could push Yahoo above the $20 mark.
I'm bullish on Yahoo and view pullbacks as buying opportunities. I'm looking to play the run-up into the announcement of a buyout deal being reached. I like to sell once the deal is announced and not hold my position until the deal is finalized. Once a deal is announced you often get a gap up close to the purchase price being offered. Depending on the buyer there is always risk that the deal may fall apart or be blocked by the government.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in YHOO over the next 72 hours.