Is this latest move by Yahoo! a sign that MSFT and YHOO are in cahoots?
Think about it:
- Last week, the two companies meet to have unofficial talks with no pre-conditions.
- MSFT pitches vision of the merged entities, maintains that initial half-stock and half-cash $31/share offer is fair and full.
- YHOO talks up AOL, News Corp., private equity opportunities.
- MSFT reminds YHOO that News Corp. passed, AOL bought Bebo and PE won’t have the credit stomach to muster up an offer.
This is where two different options enter the picture:
OPTION 1: YHOO accepts the inevitable, it will sell to MSFT.
- YHOO asks MSFT to sweeten the offer.
- MSFT says it would consider offering an all-cash deal to get the price back to $31 / share, but would need to see YHOO’s Q1 guidance, first.
- YHOO says deal was always $31 for it to even be considered, wants more.
- MSFT says: “our shareholders are already pissed, we need to confirm guidance for 2008 and affirm bullish forecasts for 2008 and 2009″ and maybe, depending on market reaction, we’ll boost it by a $1 or 2. But not more.
- YHOO comes out today with this report. We were not impressed.
OPTION 2: YHOO continues to believe it can dodge the Redmond-Express
- YHOO says that it is being undervalued and in a few short years, it can be worth more, far more.
- MSFT says “prove it, we doubt it”.
- YHOO - realizing its options for AOL, News Corp. and PE are no-go’s - takes out the “independence card” and issues today’s report touting its rosy future.
I am not sure which option is the more accurate representation of those talks, but everything Jerry Yang has done has shown to be emotional and a refusal to accept that MSFT’s acquisition is an inevitability.
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WatchMojo NewsletterYahoo! lobbies shareholder. Not sure I am convinced.
On September 2007, I suggested that Yahoo! could be a $100B market cap company by 2010. But to do that, the best route would be to go private, clean up shop and then come back stronger.
Going private, I argued, would shelter YHOO from the demands and short-term focus of Wall Street. Most importantly, it would avoid the non-stop benchmarking to Google, who at the time especially was flirting with all-time highs as a much higher growth investment opportunity exposed to online advertising and search.
To get to the $100B market cap figure, I used numbers from a previous analysis I did all the way back in October 2006 which projected a range of revenues for 2010:
AnalysisLet’s look at the numbers:
US Revenues
If US online advertising becomes a $25 to $32 billion industry. For simplicity’s sake, we’ll say the US online advertising industry will generate $30 billion in 2010.
Even with search getting 40% of that figure and Yahoo! trailing Google, Yahoo! will easily be able to earn anywhere from 15 to 30% of the total pie in the US (It will get 18% this year).
At 15% of a $30 billion online US ad industry, Yahoo!’s revenues will be $4.5B in the US alone. That’s just in America, and that’s at the lower range of 15%. If Yahoo! can a) make up market share in search and b) maintain/grow its lead in display, video and other formats of online advertising, it can generate 30%, that’s $9 billion. Google will generate 25% in 2006 of the total US ad industry and that’s just off search.
That’s in 2010, four years from now, when anything is possible. Google today logged in 25% of US online ad fueled largey by search alone. So for Yahoo! to go from a market share in search of 30% to 35% (for example) and improve monetization through Panama, then it is not inconceivable for it to hit 25% or 30% of US advertising dollars if its display/banners and video grows (forget all subscription revenues).
International Revenues
And, that’s just the US. In Q2, Yahoo! international revenues grew 38% globally versus 27% domestically in the US. I always project online revenues to be 1 to 1 for US versus international. So you can double those numbers by two:
Yahoo! could be generating revenues of $9 to $18 billion in 2010; its profit margin was 24% and 36% in 2004 and 2005 respectively.
Say it can maintain margins of 25% (hey, they won’t be hiring as aggressively as Google and there is only so much purple paint out there), this means that it can be generating profits of $2.5 to $5 billion per year, at a P/E of 25 (it’s now at 33 today), that’s a market cap of $62.5 billion to $125 billion in 2010, or an average of $93.75 billion.
With those kinds of revenues and margins, it will have more than $10 billion in cash, so a market cap of just over $100 billion.
Right now, Yahoo! is worth $36 billion.
Toda, in an effort to lobby shareholders to maintain independence, Yahoo! projects revenues of $8.8B by 2010 - or half of what Google did in 2007. I am not trying to rain on Yahoo!’s parade, but this is exactly what we shareholders have been complaining about: too little, too late.
Do not get me wrong, there is nothing per se wrong with projecting an $8.8B a year franchise… my problem is that Yahoo! has no credibility left. I would maybe consider believing this if upper management was changed and enough Board members changed to bring in a new dynamic.
Note: Long YHOO - albeit lighter.
