COMMENTARY--Don't buy into the Yahoo takeover story just yet.
Lehman Brothers analyst Holly Becker was one of the first Wall Street observers to point out the problems currently facing Yahoo (Nasdaq: YHOO), so people listen to her when she predicts a bottom, as she has today. Becker raised Yahoo to a "buy" advisory from a "market perform" rating, and the stock market responded with fervor. Shares of Yahoo were up more than 23 percent in early afternoon trading.
Yahoo proponents argue that the stock was due to revive, after falling so sharply during the past several months. As someone who works in the dot-com industry, I'd love to see our sector's bellwether rebound.
But I wouldn't count on a takeover to do it.
Becker's upgrade rests on three legs: Yahoo recognizes the need for change; its valuation had fallen below that assigned to other media companies, mainly cable network operators; and the stock price is so cheap that the company now looks like an appealing takeover target.
Her first point is unassailable. We know Yahoo will get a fresh start because the company is looking for a new CEO. The company is offering fee-based "premium" services (and Yahoo Finance users like most of you reading this column are probably a good audience to start with). Advertising is being revisited, as you may have noticed with Yahoo's wire news stories that now feature bigger ads in the middle of the text, a trend recently originated by ZDII's parent, CNET Networks (Nasdaq: CNET).
Some folks might take issue with the way Becker arrived at a price target of $20 per share, but all she's really doing is assigning Yahoo the same valuation ratios as cable companies. Her estimates of Yahoo's discounted cash flow are as good as anyone else's guess in this oh-so-unpredictable economy.
I still wonder about that acquisition bit, though.
"A new outside CEO may be more open to change and objective about selling the company," Becker writes in her research note. "For traditional media companies such as Viacom (NYSE: VIAb), Disney (NYSE: DIS), News Corp. (NYSE: NWS) or Vivendi (NYSE: V), an acquisition of Yahoo would provide an instant solution to their Internet strategy dilemmas. No doubt, they are all looking keenly at AOL's positive impact on the combined company's growth and wondering what to do about Yahoo. Obviously, for anyone who buys Yahoo, it would not be without challenges (or dilution). However, once Yahoo is snapped up, there are no more stand-alone consumer Web properties of size that would make sense as a partner for these major media companies. At current levels, valuation is probably as attractive as it will get."
Let's assume Becker is correct about everything else. Yahoo at her 12-month price target would be worth almost $11.3 billion, a price that could be absorbed in a stock-for-stock acquisition carried out by any of Becker's speculative buyers.
But would it be worth it for Disney, Viacom, News Corp. or Vivendi? It's true that their Internet operations have been muddled so far, but it's hard to imagine that they couldn't find a cheaper way to jump-start a Web business for a cheaper price than $11 billion. Organic growth is not a bad thing, and finding talented people to oversee it is probably a lot easier in the aftermath of the dot-com crash.
Even if one of a big media company goes for a quick fix and buys Yahoo, it might take years before the buyer recovers from the dilution; Becker herself estimates that Yahoo will earn nothing this year, and only 10 cents per share, or roughly $56 million, in 2002.
The Lehman analyst points to AOL-Time Warner (NYSE: AOL) envy, but it's far too early to call that merger an unqualified success. But we can say that Old Media-New Media marriages so far have failed to produce rich returns, including Disney's own experiment with Infoseek.
And whatever Yahoo shareholders may feel about an exit strategy for their investment, it's still hard to see how an outright acquisition helps Yahoo's operations more than a simpler partnership. AOL-Time Warner is all about cross-promotion and leveraging brands across multiple platforms, but a company such as News Corp. could accomplish virtually the same thing through a joint venture with Yahoo. And it would be cheaper. 22GO>