Who Should Buy Yahoo!

I got this comment on my Buying YHOO post last week:

The desk is hearing that Goldman is holding a conference call on the
internet and may be talking about Comcast or AT&T buying Yahoo.
Take a look at its volume.

Posted by: EDorsey

My first thought was that I had sold too soon. My second thought was "no, not a carrier". And the next thing I did was send the comment around to some of my friends who are active in the market.

One of them, Howard, actually blogged his reaction. I like the frank talk that Howard serves up in his post, but hate the conclusion. Exxon and Philip Morris aren’t going to buy Yahoo! But someone could at this price.

Here are the facts. Yahoo! trades at a $34bn market cap. They generate almost $500mm per quarter in cash flow, that’s $2bn per year. So on the face of it, it appears that Yahoo! trades at 17x this year’s cash flow. But that is misleading because Yahoo!’s got a bunch of cash on its balance sheet and also owns a nice chunk of Yahoo! Japan. So after you take out that cash and Yahoo! Japan, Yahoo!’s core business might trade at something like 12-13x EBITDA. You could pay an acquisition premium to the public shareholders and still make a return at that price.

So who should do that? Not a carrier. Although if it had to be a carrier, Comcast would be the one most capable of doing it right.

I think the better buyer is a media company. News Corporation is the one that most comes to mind. Rupert has shown that he’s serious about the Internet and that he is not afraid to make big bets. It would be highly dilutive since News Corp itself has a $65bn market cap, but it might be accretive to earnings given that News Corp trades at a higher EBITDA multiple than Yahoo! now. The one reason I think its most unlikely is that News Corp has shown an interest in working closely with Google and buying Yahoo! would take them in an opposite direction.

Had Sumner not broken up Viacom, they would have been an obvious choice, but neither of the "sons of Viacom" are larger on a market cap basis than Yahoo! so that seems unlikely.

Time Warner could do it from a market cap perspective, and merging AOL and Yahoo! would create some interesting possibilities. But it would be highly dilutive to earnings and that is not going to happen again at Time Warner.

Microsoft can afford Yahoo! and a combined MSN/Yahoo! would certainly be a stronger competitive player against Google, something that is clearly on Ballmer’s mind right now. That seems the most likely deal to me.

It’s surprising that Yahoo! finds themselves in this place. They made the right move to get into search with the Overture deal and are the only other viable competitor in search right now. Microsoft may get there, but they aren’t yet. But Yahoo!’s user and page growth is slowing and their monetization efforts are slowing too. And the market doesn’t like slowing.

I think the chances that Yahoo! actually does get bought is slim, but even the fact that the market is having this discussion is a wake up call for Yahoo!’s board, management, shareholders, employees, and customers.