Justin Post, an analyst at Merrill Lynch, is stoking some buyout theories again, based on his calculations of under appreciated value in Yahoo…this follows this morning’s report by Fortune about how Yahoo may have approached Time Warner to buy AOL, where we alluded to this report.
From his report: We think Yahoo’s assets would be compelling for Microsoft or a large media conglomerate looking to build a meaningful online presence. Strong user traffic growth to Yahoo! and a stable #2 search share would be valuable assets for companies committed to growing Online advertising revenues, in our view.
We had previously evaluated the potential of a Microsoft acquisition of Yahoo! in our report Microsoft/Yahoo! combination: theory… for now dated June 23, 2006.
Although an acquisition of Yahoo! at a stock price in the mid-to-high $30s would likely be dilutive to EPS in the first year following the acquisition, the strategic value of the deal would outweigh dilution risk, in our opinion. An acquisition of Yahoo! would reduce the risks and the time horizon for Microsoft to drive market share and profitability of its MSN business unit relative to its internal efforts. In the most recent quarter, Microsoft reported 5% y/y growth in Internet advertising, well-below our estimate for industry growth of 26% as Microsoft’s AdCenter is just beginning to build its advertiser base. A Microsoft/Yahoo! combination would be in a better position, in our view, to compete against Google.