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Five reasons for more worry at Yahoo

CNET News has compiled a handy guide for worrywarts trying to figure out what exactly could make matters worse at the Internet pioneer.

Dawn Kawamoto Former Staff writer, CNET News
Dawn Kawamoto covered enterprise security and financial news relating to technology for CNET News.
Dawn Kawamoto
4 min read

No doubt, it's been a doozy of a year for Jerry Yang & co.

Yahoo could have been sold for $33 per share to Microsoft back in the spring; now it's trading at less than $12. Internet advertising may be in for a rough patch, along with the rest of the economy. And morale at the Internet pioneer, well, just isn't what it used to be.

With that in mind, we thought it would be helpful to create a handy list for Yahoo watchers to keep in mind as Yahoo struggles to right its ship in the face of federal scrutiny, investor wrath, and impending earnings in the middle of scary economic conditions.

The amazing, shrinking stock price
Yahoo's shares closed in the $11-a-share range Wednesday, setting a new 52-week low and tagging a new psychological watermark for investors. No doubt, most tech companies are getting pummeled on Wall Street, but Yahoo's drop has to be particularly galling, given how much more Microsoft was willing to pay for the company.

Yahoo closed at $11.75 a share, down 7.1 percent, during regular trading. That gave the Internet search pioneer a market capitalization of roughly $16.3 billion. For those of you still keeping track, that's less than half of what Microsoft offered in its initial $44.6 billion unsolicited bid for Yahoo at the start of the year.

Never mind the earnings, worry about the forecast
Yahoo's third-quarter earnings are set to be released Tuesday, and Wall Street is bracing for rough times ahead. Several analysts on Wednesday cut their earnings estimates for Yahoo and other Internet players, who rely on advertising as their main source of revenue, a challenge in this struggling economy.

According to a research report by Sanford Bernstein & Co:

Yahoo reports 3Q:08 results on Tuesday. We expect a poor performance, with net revenues of $1.39B (9 percent year-over-year growth) vs. consensus of $1.37B (7 percent growth) and pro-forma EPS of $0.07 vs. consensus of $0.09, largely because of the weak advertising environment.

Yahoo's U.S. search share declined again in 3Q:08 to 14.5 percent of all searches, down from 15.5 percent in 2Q:08 and 18.3 percent in 3Q:07. Yahoo's annual growth of 1.5 percent is much lower than the 28.2 percent growth in U.S. searches overall, implying further share loss to Google.

Those pesky feds
Yahoo is slated to hear from the Department of Justice next Wednesday on whether it will get a thumbs-up or thumbs-down on their search-advertising partnership with Google.

A number of advertisers and trade groups, competitors like Microsoft, and politicians have weighed in on the controversial deal, which calls for Yahoo to use Google's ads on its own search pages.

The Justice Department has expressed concerns that it could raise prices for advertisers and potentially lead to Yahoo exiting the search-advertising business. According to published reports, Yahoo and Google are in settlement talks with the Justice Department to avoid a legal challenge to its deal, which Yahoo has previously said could generate as much as $800 million in revenues in its first year and an additional $250 million to $450 million to its operating cash flow in the same period.

It's hard to say which way the feds will go on this, but there's little question over whether Yahoo's executives have a lot of revenue potential--and credibility--riding on the Google deal going through.

AOL: Ties that don't make sense?
Former Sun Microsystems CEO Scott McNealy, back when he was still the chief executive and a Silicon Valley soothsayer of sorts, had a brutal description of the planned merger of Hewlett-Packard and Compaq: it's like two garbage trucks backing into each other in slow motion.

That brings us to the most recent reports (and we're not counting Henry Blodget's weird whipsaw reporting Monday) that Yahoo may be looking into acquiring long-troubled AOL. Yahoo's new board has reportedly given executives its blessing to sit down with Time Warner's AOL to strike a deal.

And in the past two weeks, more reports have surfaced that a deal may be had sometime this month, with Yahoo snapping up AOL's content business.

But Sanford C. Bernstein analysts panned the prospect of Yahoo and AOL synching up in a deal. The Wall Street firm said the potential size of an AOL acquisition would be dilutive to Yahoo shareholders, who have already suffered through a tremendous stock drop in the Internet search pioneer. And Bernstein analysts noted that combining AOL's Advertising.com with Yahoo's Right Media Exchange would not drive short-term incremental revenues.

Oh yeah: Wall Street typically gags when a company announces a big acquisition, and traders often end up dumping a lot of shares of the acquirer. Shareholders won't be happy if that does happen. But they should hope that McNealy's description of the HP-Compaq merger, which turned out to be inaccurate, also misses the mark if Yahoo and AOL do a deal.

Those interlopers in Redmond
With the prospect of Yahoo's shares dropping even further after its earnings announcement, and that of a walk-away from the Google deal due to regulatory pressures, Yahoo may find its market capitalization hovering near the levels that Microsoft offered to buy out just its search business, following the collapse in talks to buy out the entire company at $33 a share.

With its initial offer to acquire just Yahoo's search business for more than $9 billion at the time of its offer earlier this year, Microsoft could be looking at throwing a few more billion-dollar bones on the deal to snap the entire company.

That is, of course, if Microsoft CEO Steve Ballmer still cares.