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Yahoo Makes The Case: ‘We’re Doing Okay’; Why Microsoft Offer Is Too Low; Evaluating Alternatives

imageYahoo (NSDQ: YHOO) has claimed that Microsoft’s (NSDQ: MSFT) buy offer significantly undervalues the company. Now it’s trying to explain why. The company has filed financial projections for the coming year, affirming its prior outlook, while predicting solid growth in the years to come. The company notes that all of its projections were cooked up prior to Microsoft making its offer. Key highlights (the full presentation is embedded below):

Financial outlook: For the coming quarter, the company is standing behind current guidance. That’s significant, since earnings miss would weaken their hand in the ongoing negotiations. Operating cash flow is expected to grow from $1.9 billion to $3.7 billion by 2010, while revenue ex-TAC is expected to hit $8.8 billion in the year. That would represent about 25 percent annual revenue growth from 2008.

Strategy: In the filing, the company reiterates that it remains a “must-buy” for advertisers, due to its breadth, considering how many users it touches. It also trots out well-worn stats, that in areas like webmail and personal homepages, it remains a leader. Going forward, its touting new innovations, like open search and Yahoo Buzz. It also notes that initiatives like Panama, designed to increase revenue per search, are still in their early days, so it’s premature to say that any boosts from that are already baked in. Altogether, search revenue is expected to grow by $1.4 billion over the next three years, with yield improvement contributing to about two-thirds of the growth.

Display: Like Google (NSDQ: GOOG), Yahoo claims it’s got good things going in display advertising. Unlike in search advertising, where the market is dominated by just a couple of players, display is wide open, meaning plenty of upside to a company that could establish itself as a central, ad-serving platform. By 2010, the company expects to touch 28 percent of this market. In terms of the financial impact from display, it anticipates 12 percent annual growth rates and yield gains of 15 percent each year. This area is expected to tack on about $1.9 billion in extra revenue, with more than half coming from yield improvement.


Read this doc on Scribd: yahoopresentation

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Lots more after the jump.

Other growth areas: Mobile and emerging markets, with the letter expected to show 30 percent CAGR through 2010.

‘Dear Microsoft, please raise your bid’: Page 27 of the filing details all of the ways Microsoft stands to benefit should it acquire Yahoo: “Yahoo! provides meaningful strategic value and warrants a significant acquisition premium above its equity value in a potential change of control transaction.” It looks like the company is basically telling Microsoft that if it wants to make the deal happen, it needs to raise its bid. Consider this to be the counterpoint to the sales pitch Microsoft delivered to Yahoo last week.

–Key points: 1) Microsoft’s “sub-scale” ad assets stand to benefit from what Yahoo’s built up. 2) Yahoo’s Asian assets will be a boon to Microsoft. 3) Cost synergies will make Microsoft’s internet assets profitable. It cites a JPMorgan report predicting cost savings 2x-3x Microsoft’s $1 billion projection. 4) The proposed multiple isn’t up to par with other deals.

The bottom line: “The presentation supports the unanimous determination by the Company

4 Responses to “Yahoo Makes The Case: ‘We’re Doing Okay’; Why Microsoft Offer Is Too Low; Evaluating Alternatives”

  1. Ralph Freely

    MSFT couldn't have known this, but they made their offer too early. They should have waited until now and offered $25. MSFT should not pay another cent for Yahoo, and given the ongoing financial crisis, US recession, and the stock market downward plunge (today's bump due to Fed 3/4 point action is just another false positive), Yahoo's stock price is being propped up by MSFT alone. Luckily, Jerry Yang's head in the clouds dilly dallying is just the window of opportunity MSFT needs to retract and/or lower the offer.

  2. mocorocker

    I think Yahoo is going to get creamed in the medium-long run. Let's not forget they had their chance to be what Google is today and they blew it. This MS opportunity will prove no different.


  3. there you go…..good job, Yahoo.

    is it possible that we'll see a scenario where microsoft raises its bid some more, yahoo evaluates it as a 'strategic alternative', and in the 3-4 months all this plays out, yahoo actually meets/outperforms its quarterly targets…(rendering the microsoft offer impotent, in the process)?

    i'm beginning to get less concerned about the yahoo-story at this point, and more curious about the microsoft-story.
    where would microsoft be 4 months down the line if their (rather obscene) show of muscle still ends up in failure?