When pundits think of what might be in store for Yahoo! (YHOO), the options that come to mind are as follows:
status quo merger with eBay (NASDAQ:EBAY) acquisition by/merger with Microsoft (NASDAQ:MSFT) taken private
No one really suggests that Google (NASDAQ:GOOG) will and can buy Yahoo!, and that has a lot to do with the current breakdown of the search engine market space.
Any combination of Google with Yahoo! would yield a monopoly obstacle. Google’s 57.4% market share in search and Yahoo!’s 22.9% gives the Stanford alumni 80.3% market share in the influential search engine industry. But, some dealmaking could make that a non-issue.
I’ve already argued that in many ways, Yahoo! being taken private would shelter it from envious investors that yearn for Google’s faster growth rates. That would allow it to continue to throw off more cash and eventually be taken public again when online advertising is an ever bigger juggernaut.
But say Yahoo! chooses not to stay independent as a publicly traded firm or go private; the options remain sell to Microsoft or merge with eBay. The objection that some people raised with MSFT were conflicting cultures and Jerry Yang’s supposed disdain of MSFT products.
But what about Google?
Sure, the egos at Yahoo! might never allow this to happen, for Yahoo! was close to buying Google for $1B, or so goes the legend. But what if egos can be set aside and Yahoo! considered a $50B offer from Google. At a market capitalization of $160B, with $10B in cash, that gives Google a $150B enterprise value.
Of course the second issue is would Yahoo! stockholders accept a stock deal, since Google will have, after a $3.1B Doubleclick acquisition, and about $7B in cash left.
Assuming there are no restrictions and Yahoo!’s shareholders can simply sell the Google shares shortly thereafter, then let’s assume that this would work as well. Moreover, one of the main arguments why Yahoo! shares are in the dumps, some would argue, is that Yahoo! shareholders suffer from Google envy. Mind you, as a Yahoo! shareholder, I’m not sure I’d prefer having Google at $150B than Yahoo! at $36B. But I also said that with Google at $30B, $40B… okay, this is painful, you get the idea.
So assuming Google offers and Yahoo! accepts a $50B deal, that means that Google/Yahoo! (I’ll spare you all the potential names for a combined entity) would have a combined value of about $200B, with Yahoo! shareholders owning 25% of the firm. Like I said, I’m not sure Yahoo! shareholders would accept this, but it is 25% of a $200B enterprise value entity, that with its roughly $10B in cash (Google would have $7B, and Yahoo! $3B.) would have a market capitalization of $215B.
That, I’m sure you noticed, would technically be pretty close to Microsoft’s $259B enterprise value (its market cap as of today is $285B). Of course, how could this happen, given that a combined company with 80% market share would never get approval to merge, right? Wrong.
Some objections: Yahoo! has spent a lot of time and money to build Panama. But the flip side is that Google’s monetization is currently at $0.11, compared to Yahoo!’s $0.04. Of course, on record: as a Yahoo! shareholder, I fully encouraged, encourage and will encourage Yahoo! to build and own its search business. I think any new media company who relies 100% on Google for search is foolish. But in the context of building a powerful combination that would get by legal scrutiny, if Yahoo! shareholders really wanted this to happen, they could simply sell its search business to someone else, be it MSN, who commands but 8.8% share, or even IAC (IACI) (though I doubt it could afford it), or Time Warner’s (NYSE:TWX) AOL, which commands but 5% market share.
Bear in mind that in the wacky world wide web, sometimes some deals don’t really make sense strategically, they just are part of legacy deals, arrangements, etc. Example: Google owns 5% of Time Warner’s AOL, yet Time Warner properties CNN.com, and SI.com have their search engines powered by Yahoo! In some ways, it makes total sense; in other ways, it’s banal.