Who Should Buy Yahoo!

I got this comment on my Buying YHOO post last week:

The desk is hearing that Goldman is holding a conference call on the internet and may be talking about Comcast or AT&T buying Yahoo. Take a look at its volume.

Posted by: EDorsey

My first thought was that I had sold too soon. My second thought was "no, not a carrier". And the next thing I did was send the comment around to some of my friends who are active in the market.

One of them, Howard, actually blogged his reaction. I like the frank talk that Howard serves up in his post, but hate the conclusion. Exxon and Philip Morris aren't going to buy Yahoo! But someone could at this price.

Here are the facts. Yahoo! trades at a $34bn market cap. They generate almost $500mm per quarter in cash flow, that's $2bn per year. So on the face of it, it appears that Yahoo! trades at 17x this year's cash flow. But that is misleading because Yahoo!'s got a bunch of cash on its balance sheet and also owns a nice chunk of Yahoo! Japan. So after you take out that cash and Yahoo! Japan, Yahoo!'s core business might trade at something like 12-13x EBITDA. You could pay an acquisition premium to the public shareholders and still make a return at that price.

So who should do that? Not a carrier. Although if it had to be a carrier, Comcast would be the one most capable of doing it right.

I think the better buyer is a media company. News Corporation is the one that most comes to mind. Rupert has shown that he's serious about the Internet and that he is not afraid to make big bets. It would be highly dilutive since News Corp itself has a $65bn market cap, but it might be accretive to earnings given that News Corp trades at a higher EBITDA multiple than Yahoo! now. The one reason I think its most unlikely is that News Corp has shown an interest in working closely with Google and buying Yahoo! would take them in an opposite direction.

Had Sumner not broken up Viacom, they would have been an obvious choice, but neither of the "sons of Viacom" are larger on a market cap basis than Yahoo! so that seems unlikely.

Time Warner could do it from a market cap perspective, and merging AOL and Yahoo! would create some interesting possibilities. But it would be highly dilutive to earnings and that is not going to happen again at Time Warner.

Microsoft can afford Yahoo! and a combined MSN/Yahoo! would certainly be a stronger competitive player against Google, something that is clearly on Ballmer's mind right now. That seems the most likely deal to me.

It's surprising that Yahoo! finds themselves in this place. They made the right move to get into search with the Overture deal and are the only other viable competitor in search right now. Microsoft may get there, but they aren't yet. But Yahoo!'s user and page growth is slowing and their monetization efforts are slowing too. And the market doesn't like slowing.

I think the chances that Yahoo! actually does get bought is slim, but even the fact that the market is having this discussion is a wake up call for Yahoo!'s board, management, shareholders, employees, and customers.

Comments

[howardhoward lindzon]

My ending should be hated. That's the point. Any of the yutz's in your ending is just bulk and roll. Yahoo will be the same, just boringer and older.

I was just making a oint that something bold with Yahoo has to be done or they better get their act together and restartegize and make it alone - FAST or Google will finish them off.

[Erik Schwartz]

Occam's Razor.

Google should buy Yahoo!.

Google needs to increase their inventory and their home grown verticals aren't cutting it. Y! on the other hand has tons of inventory in their verticals and they do a poor job of monetizing that asset.

gmail while widely admired only has about 20% of the user base of Y! mail. Converting over all those Y! Mail users allow GOOG to pretty much corner the email market.

Google wouldd take out their only real competitor in search

Y! knows much more demographic data about their users than GOOG.

Finally, it might not end up being a disaster vis a vis the merging corporate cultures. Any of the other take over candidates would never integrate Y!'s culture successfully.

[howard lindzon]

I like Erik's aggressive thinking on this

[franky]

Google seems to me appropriate as well, but (especially in Europe, I don't know about the US) such a move would get blocked by the monopoly regulations. Google would acquire more than 2/3 of the search market and also a merge Overture/Yahoo! Ads/Adsense would surely not be allowed. Although I do like the idea, especially Yahoo Talk!

[Nicholas]

if you believe that google's real competitor is microsoft, then acquiring yahoo! makes sense...for _either_ of them.

but it probably makes more sense for microsoft.

[Joseph Hunkins]

Like you I recently bought some Yahoo but I'm holding on, confident that the great "new web" stuff they have been up to for several years will eventually pay off.

Agree that MS is the logical buyer but I don't think MS has the vision to see how incredibly competitive they could be with Google after a Yahoo aquisition. The combined MS Yahoo audience, esp. if you count mail systems, would be nothing short of spectacular. Unlike the old guard at MS, the MS LIVE teams seem to think and act much like Yahoo and Google teams so the cultures would mesh fine IMHO if you could keep the old MS guard out of the day to day workings of Yahoo.

[Christian Cadeo]

I won't comment on the MSFT/Yhoo combination but can say that there is no way a Goog/Yhoo would fly pass the anti-trust folks.

My bet is T would make the buy. They are already tight with Yhoo and this would put a front end to their dumb pipes.

[phoneranger]

Why not GE or DIS? Or NYT? or any old media company looking for a way forward? Market cap comparisons are for logical people. This is Candyland we are talking about.

[milo317]

Defintetely Microsoft should buy Y, they have the tech and knowledge to bring Y up again.

[Chris]

Fuel to the Google fire: Yahoo! also has much better local information, such as restaurant and store locations. Google seems to populate their maps automatically (based on culling the web for businesses), while Yahoo! seems to actually pay people to enter this information (or purchase it from someone).

[dr]

i've got a gut feeling on this one: google wants to watch yahoo bleed, and eventually die. either that or it will prop yahoo up somehow and keep it around to avoid the eventual antitrust suits that are brewing off in the wings.

their core philosophies are too different, like oil and water. read 'the search' for more on that.

[Alain Marsily]

Why always looking at "classic" players (Google, MST,...). Such companies like Dell, Sony, Apple, LG... could also be good candidates for Yahoo. Nevertheless, I think Yahoo can continue alone. Market share isn't the only goal and you don't create it overnight. Market value could ease with time for any candidate buyer or Yahoo could himself regenerate. In fact, I think Yahoo could improve his market position faster vs other company loosing critical market value/position/share or in defensive play.

[Declan]

Surprised nobody has mentioned the more likely option IMHO of Yahoo getting taken private - plenty of hedge funds around willing to finance it - all the pieces are in place to bounce back under the right leadership - going dark for a spell given its lack of love from the markplace would give it the breathing space to put its house in order - now about your sites load time Fred ....

[Daniel Nicolas]

If anyone evil buys Yahoo, I swear I will purchase Flickr from them so they don't become tainted.

[James]

Yahoo has serious, serious execution issues. It is by now obvious that Terry Semel is no match for the Google boys. His contribution was to stop the bleeding after Yahoo got caught in the post-bubble maelstorm. But he doesn't have any feel for the web - under him, Yahoo has become a west coast AOL.

It is unpardonable in my book that with his vaunted Hollywood background a) first he loses to YouTube b) then loses YouTube to Google. Sleeping at the switch sums it up.

Yahoo is the new 3Com. Getting bought now may save the founders the ignominy of creative destruction by Google and a hundred other not-so-start-ups coming after their traffic.

[tom]

I think the perfect combination would be yahoo, microsoft and salesforce. yhoo and msft are the two kids left at the alter and could benefit each other with the combination of the msft online properties with yhoo online properties and msft has the financial ability to do it. salesforce is a perfect fit for either msft or goog due to their Apex platform. that platform/ecosystem lays the foundation for building a kickass office2.0 because that isn't just about word processing and spreadsheets, it is about supplying unique and individualized solutions to anyone who connects to it. think it out....it makes sense that salesforce gets taken out before they get too much traction because they could really hurt orcl, msft and goog if they continue their momentum with adding more ISVs offering their software on an on demand basis. salesforce.com service is far and away the most simple to use(no bullshit client), so simple to implement(no 3 yr development by consultants) and it scales for both the vendor(ISV offering their s/w) and the user(can instantly other services without procuring any h/w, s/w or datacenter space.

[Smart Cooking]

Howard Lindzon doesn't have a clue about what's really going on at Yahoo! A buyout by Exxon? That is so 5 years ago.