Research Roundup: Yahoo Heats Up
After two fairly quiet months, Microsoft’s (NASD:MSFT) battle to acquire Yahoo (NASD:YHOO) is heating up.
According to Piper Jaffray analyst Gene Munster:
While it is only a minor test of Google’s search service, the deal shows Yahoo’s intentions in seeking alternatives to the Microsoft bid and could give Yahoo some previously non-existent leverage in the negotiations.
Less than an hour after the announcement, Microsoft responded with a statement suggesting that a deal outsourcing Yahoo search to Google would violate anti-trust laws.
Yesterday evening, the Wall Street Journal reported rumors that Yahoo and Time Warner (NYSE:TWX) were close to finalizing terms for a deal in which AOL would be spun out of Time Warner and merged into Yahoo. Time Warner would also provide cash to Yahoo and would receive 20% of the combined company. Yahoo would use the cash for a share buyback in the public markets, with a target price above that of the existing Microsoft offer.
About the same time, the New York Times reported that Microsoft and News Corp (NYSE:NWS) have apparently joined forces in an effort to make a revised bid for Yahoo. The potential deal would have News Corp spin out its Fox Interactive Media division, which includes popular social network MySpace, plus cash in the deal.
The heated battle presents Yahoo with some interesting, yet difficult decisions. At present, it seems their primary goal is independence, which would push them towards the AOL deal, in conjunction with outsourcing search to Google. According to PaidContent:
If Yahoo can logically show that it gets a 30-40 percent revenue lift on the test, then they have a story to tell—that, if combined with AOL, they have enough scale, cut down costs by outsourcing search and search ads to Google, and add to that a possible share buyback with Time Warner supplying the extra cash, the combination has earned the right to stay independent.
But Stanford Group Research analyst Clayton Moran suggests that a Yahoo-AOL deal would not provide the shareholder value that the Microsoft deal would, noting that “the proposed stock buyback appears like an attempt to artificially inflate the stock”. Jefferies analyst Youssef Squali notes that while outsourcing search may provide a short-term boost to Yahoo’s financials, “it will weaken Yahoo’s strategic position in the long term”.
The ultimate decision for Yahoo will not be easy.
Choosing between Microsoft and Google must seem like sailing between Scylla and Charybdis for Yahoo according to Christa Quarles, analyst at Thomas Weisel Partners.
Regardless of the ultimate outcome, the near-term winner looks to be Google. The competing deals will likely prolong the process. If either deal happens, the additional parties will make integration more complex, and clearly, if Yahoo ultimately pairs with AOL, it will strengthen Google’s share of the search market.
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