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What Yahoo is really worth

Don Reisinger thinks Microsoft is overvaluing Yahoo. Is it?

Even though Microsoft's self-imposed deadline on the Yahoo deal has passed, the company quietly leaked a report to the Wall Street Journal this week that said it was willing to pay $32-$33 per share for Yahoo. That was then followed by an update to the story claiming a final decision by Microsoft's board has not been made.

Regardless, the very fact that Microsoft is even entertaining the thought of increasing its bid is both foolhardy and extremely flawed. Why would it want to pay more for a company that's actually worth less?

According to the letter it originally sent to Yahoo when it first made its bid for the company, Microsoft claimed that it was offering Yahoo a 62 percent premium and as a sign of goodwill, would make the offer with both cash and the company's stock.

A 62 percent premium? Are you kidding me? At the time, Yahoo's stock price was barely breathing and floundering at about $19 per share. Since then, the price has gone artificially high and now Microsoft feels like it should pay more to entice shareholders to its side.

I have some news for Microsoft -- Yahoo is worth no more than $25 per share.

According to Yahoo, it thinks it deserves a valuation that puts its stock price into the high thirties range. I think that's crazy. What could possibly justify that valuation?

Let's take a look at where the company stands right now.

Not only is Yahoo woefully behind Google in the US search market and losing ground on an almost daily basis, it has yet to find a worthwhile way to leverage its enormous user base and create greater revenue, and it still has yet to solve one vexing problem -- how can it skillfully consolidate its slew of services without losing valuable traffic and increasing numbers at the same time?

Financially, the picture doesn't look much better. Right now, the stock price, which is already inflated because of the prospect of a deal with Yahoo, is hovering at about $27 per share. In other words, Yahoo's board wants a premium of almost 40 percent on its current stock price regardless of the original valuation. It's kidding, right?

That said, Yahoo is still an extremely profitable company and according to its last quarter numbers, enjoyed revenue of over $1.8 billion and a net income of almost $206 million. In 2007 alone, the company realized a profit of $660 million.

And while that may sound good at first, when taken in historical terms, Yahoo is going downhill fast. In 2005, the company's net income was at almost $1.9 billion and in 2006, it dipped to $751 million. Since 2005, Yahoo's net income has been cut by about 66 percent.

Along with that slide in net income, Yahoo's share price fell too. In a little over two years, Yahoo's stock price has been cut in half and the company's viability to its shareholders has dropped with it.

And suddenly, the slumping Yahoo stock was rejuvenated when Microsoft announced that it would acquire the company. But amid the bickering between both firms, Yahoo's position in the marketplace hasn't improved and so far, I simply don't see how there is any quick fix.

At best, Yahoo is worth about $25 per share. As it stands, the company's profits are slumping, its stock price has fallen considerably over the past few years and Microsoft's ridiculous premium is extremely high.

Yahoo's diluted earnings per share is just 0.76 and with a profit margin of just 14 percent, I simply don't see how Microsoft can justify spending that much on a company that does that little. Perhaps most telling, the company's price-to-earnings ratio is so high, the value of the stock at $27 is much higher than it should be. Realizing that, how can Microsoft or Yahoo value the company so highly?

Of course, the answer is quite simple. Microsoft is more than willing to pay such a high premium on Yahoo's stock price because it wants to put pressure on the company's board and it ostensibly believes it can do a better job all-around with Yahoo's services to play with.

And while I'm not so quick to agree, I can't blame Microsoft for trying. Just don't expect me to believe this deal will happen.