What's Yahoo's Next Move?

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Includes: AABA, AAPL, CMCSA, GOOG, MSFT, NWS, T
by: Eric Savitz

So let’s do a quick recap on where we are with Microsoft’s (NASDAQ:MSFT) stunning $31 a share bid to acquire Yahoo (YHOO).

According to the Wall Street Journal, Google (NASDAQ:GOOG) has offered to help Yahoo thwart the MSFT bid. This is fairly amusing, and entirely self-serving; nothing would irritate Google more than seeing Yahoo acquired by Microsoft. There was also much weekend speculation about other bidders, but so far none has materialized. Among the supposed potential alternative bidders: private equity, Apple (NASDAQ:AAPL), News Corp. (NASDAQ:NWS), Google, Comcast (NASDAQ:CMCSA), AT&T (NYSE:T). But I have not heard or seen one theory that seems credible.

In a research note Monday morning, Stifel Nicolaus Internet analyst George Askew says “the numbers don’t work” for a private equity bid for Yahoo. He runs the numbers on a potential $36 a share, $51.5 billion, in which the deal was financed with $22.9 billion in new debt plus the sale of $12.5 billion in minority equity investments. In his calculations, he assumes Yahoo outsources search to Google, cuts expenses 20% via big headcount reduction, chops cap ex 30% and focuses the company being an Internet portal, publisher and provider of fee-based services.

He doesn’t think it works. One, he says “the financing and operational risks are too high.” Two, the cash flow isn’t high enough. And three, Microsoft would likely top any competing bid given its own deep pockets and potential synergies.

Askew does think that the bid could move up as much as 10% to achieve a friendly deal “and enable Yahoo management to enjoy a negotiating victory.”

Some other Street comments:

  • Merrill Lynch’s Justin Post Monday morning contends a deal with MSFT is a better option for Yahoo than outsourcing search to Google. He says AOL Search has less value today than it did when it signed its own Google search outsourcing deal. Post adds that Google would have access to competitive info in Yahoo users. He also thinks it could be easier to win anti-trust approval for a MSFT acquisition than a Google/Yahoo partnership which would consolidate 80% market share in search. He also says that when the theoretical Google/Yahoo partnership came up for renewal, Google could demand a lower TAC rate, “and there might not be any search advertiser relationships to offer competitive monetization. Writes Post: “It seems to us Google has its, not Yahoo’s, best interests in mind.”
  • Rob Sanderson, of American Technology Research, Monday morning asserts that the likelihood of a higher bid from either MSFT or someone else is “high.”
  • William Morrison, ThinkEquity, has simple advice for Yahoo holders: “Take the money and run.”

Monday morning:

  • Microsoft is down 5 cents at $30.40.
  • Yahoo is up 57 cents, or 2%, at $28.95.
  • Google is down $12.89, or 2.5%, at $503.01.