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Summary:

Yahoo’s stock had been declining steadily for almost two years before Microsoft showed up with Mad Money, yet the Internet portal thinks it’s worth $40 a share. I think Yahoo is suffering from a case of corporate delusion.

Yahoo’s stock had been declining steadily for almost two years before Microsoft showed up with Mad Money, yet the Internet portal thinks it’s worth $40 a share. Fact, or a case of corporate delusion? I think it’s the latter. Why is it worth $40 a share? (Is it because Microsoft offered $40 a share for Yahoo earlier, and Yahoo never took the offer and now are banging their head against the wall?)

Last time Yahoo traded at over $40 a share was back in January 2006. Now I am not against the idea of Yahoo squeezing more money out of Microsoft, as long as Yahoo can make a good case for it. Still, a 60 percent premium isn’t enough for Yahoo’s investors such as Bill Miller of Legg Mason, a mutual fund company. In a letter to investors in his fund, he writes:

Our own valuation work puts the value of YHOO in the range of those reported numbers, though, and we think MSFT will need to enhance its offer if it wants to complete a deal. YHOO shares were recently trading at a four-year low, and the stock averaged above the current offer price for all of 2004. YHOO is a uniquely valuable asset, and we expect MSFT will do what it takes to acquire it.

I would love to see Miller’s valuation work on Yahoo. Call me cynical, but there is a reason the stock is trading at a four-year low. Of course, this is the same fund that has big positions in stellar performers like Countrywide Financial, eBay and Sprint Nextel.

Many Wall Street analysts think Yahoo is worth between $34 and $35 a share. And that is the best case scenario, and assumes that everything will go right for the company in the display advertising business. Gee, I wonder why Google is spending over $3.1 billion trying to buy DoubleClick?

I think Yahoo is suffering from a case of corporate delusion. The company’s litany of woes is so long that it’s going to take some time before the proverbial sun will shine on Yahoo’s cow patch in Sunnyvale again. People seem to have already forgotten some of the problems that showed up in the fourth quarter of 2007 (not that they’ve been resolved), such as:

* Yahoo’s search revenues slowed down after growing for four straight quarters.
* Yahoo used to get paid by the broadband providers, but now it will have to pay them a piece of the advertising action. That will result in between $150 million and $200 million in lost fees in 2008. This was presented as a positive, but getting paid isn’t the same as paying. (AT&T and BT are offering between $300 million and $400 million as upfront payments, while Rogers will pay $50 million.)

And look at yesterday’s layoffs. After sending out an email thanking the troops for sticking by the company, Jerry & Co. cut about 1,000 jobs. Nice morale-boosting move. Memo to Yahoos: Jerry-atrics are as likely to shank you as the Barons of Redmond.

There will be some of you who might accuse me of being too hard on Yahoo, and perhaps I am. But it is hard to have empathy for a company that has consistently managed to underperform. It has been losing the talent that made it great. More importantly, there seem to be very few reasons to catalyze growth and a better future at Yahoo.

And if Microsoft wants to pay a 60 percent premium for this kind of a future, that’s a pretty good deal.

By the way, if you want to catch up with the roller coaster of the Yahoo-Microsoft showdown, Kara Swisher has a nice wrap-up today, while Michael Arrington is reporting of talks between Yahoo and News Corp.

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  1. Who is to blame, I don’t know. But I’m in total agreement with you on this. As Cramer says it best… “Who does Yahoo! think they are?”

  2. Yahoo has shown a distinct lack of fundamental innovation right from its very beginnings. Name a single technology OR product that Yahoo has pioneered in its ten year+ history. This should have been the company that did the best search, could have been the first ‘cloud’, should have been monetizing search better, could have been the *bay, should have been….

    From its beginnings as an incrementally better & bigger directory, its been an incremental innovator. A bit here, a bit there and always an MSB short of a full byte.

    So here we are in 2008, it still has massive user numbers who have stuck around but not pushed Yahoo to innovation or punished it for not innovating. A permanent state of limbo.

    The valuation being offered by Microsoft seems generous given the current macro economic conditions and within the range a deal could get done.

    And so it goes.

  3. Methinks it’s not so much delusion as it is denial…sort of an, “Anyone but you!” rejection of Microsoft. They just needed some type of way to justify the move and stall for time.

  4. At the end of the day, Yahoo! is a directory service at the core. It has done little in way of innovation, but it is difficult to argue that Yahoo! is NOT the premiere directory on the internet. That said, the MS offer is fair in that regards, and in my opinion Yahoo! should take the offer on the table.

  5. Actually if you take the cash on yahoo’s balance sheet and then do your math, microsoft’s offer represents 200% premium over the price that wall street thought yahoo’s operations were worth. The calculation of that 200% premium may be moring to a majority of your readers. However you may take a look at the same at my blog at
    http://binaryday.com/2008/02/13/shareholders-start-to-file-case-against-yahoo/

  6. As a Yahoo shareholder who bought the stock back in 2000, I’m glad they’re trying to hold out for more…

  7. Om, you may be more right than you know, if ‘litanies of woes’ like these are any indication…

    http://manwhoknowsthemac.blogspot.com/2008/02/nine-ways-yahoo-has-already-eviscerated.html

  8. Probably yahoo do not accept ANY offer, they try to be independent. IMO, in the current recession Yahoo does not worth for more than $25 a share.
    I guess, MS already know that Yahoo do not accept the offer at $30, if the talk goes for long time(10+ months) that is not good for GOOG (MS initiated a proxy war?). MS may try to build a better search engine instead.

    I like to see that Yahoo should buy BIDU, MS should buy CMCSA, Google should buy a mobile operator. If it happens, there would be a heavy competition and lot of innovations. that’s good for everyone.

    thanks
    saran

  9. They are worth exactly what someone is willing to pay. If they can get some foolish company or the public markets to cough up $40/share, Yahoo is right. Otherwise, they are wrong. As an outsider, it seems that Yahoo is a lot more valuable as a part of Microsoft than as a standalone concern. Possibly, Yahoo themselves feel the same way and are just trying to drive up the price. Certainly, this would not be the first time a company rejected an “unsolicited” offer only to be acquired by the same company, at a higher price, not long down the road.

  10. Saran, how would it help Microsoft to buy Comcast. One could argue that regulatory scrutiny is already their biggest problem and buying a network operator would increase that by an order of magnitude. Anyway, given that they already have a boxes inside peoples houses (XBox and Windows PC), they would be better served by building their own network. Why spend their piles of cash upgrading Comcast’s legacy stuff when it is more cost efficient to build new stuff from scratch? Penetration of XBox and Windows PC is a much bigger footprint than Comcast’s physical plant.

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