Now What? Yahoo’s Got Options, But Analysts Say The Best Ones Involve Third Parties

imageWhat should Yahoo (NSDQ: YHOO) do now? That’s the question swirling in the wake of the collapse of its paid search deal with Google (NSDQ: GOOG) — a deal the battered media giant championed as a key reason why it shouldn’t sell all or part of itself to Microsoft (NSDQ: MSFT). But the Google withdrawal has some analysts suggesting a renewed Microsoft bid (which shareholders might be even more inclined to now, given Yahoo’s pummeled stock price). After all, MSFT CEO Steve Ballmer did hint that the deal “would still make sense economically” less than a month ago (though MSFT later officially said there was “no interest”). Needham & Co.’s Mark May quickly laid out four options for Yahoo — and kept his position on the stock at HOLD. Details after the jump.

Yahoo stays solo: May says this is the most probable (35 percent likely) outcome and sets a low target price ($11 – $13). This course includes imminent layoffs and continued staff changes amidst a weakening display market. Simply put — more of what we’ve seen over the past few months.

Microsoft renews its bid for Yahoo as a whole: Second most likely (30 percent) outcome, and seemingly the most attractive for shareholders. Target price of $20 – $25. It’s what some shareholders have been begging for, and while MSFT did quash those hopes — that was before the deal it so valiantly lobbied against fell through.

Yahoo and AOL (NYSE: TWX) merge: Maybe 20 percent likely, and the lowest price target of all ($10 – $13), simply because two wrongs don’t make a right. AOL is hemorrhaging display revenues on its own, and neither company seems strong enough to be able to weather the infrastructural and personnel changes a real integration would require. Still, rumors about a possible merger refuse to die.

Yahoo sells search to Microsoft: Least likely at 15 percent probability, but the second highest share price target at $18. Yahoo’s brass seemed more vehemently opposed to this scenario than an outright deal, as CEO Jerry Yang argued that owning both search and display channels was key to any online advertising giant’s success. Still, with stock price hovering at close to $14 right now , this option could come back into play.

Meanwhile, May says Google is much less affected by the dissolution: “We do not view this as a negative for GOOG because the financial loss is minimal.” How minimal? The firm estimates that the deal would have only generated between $50 million and $75 million in net revenue for all of 2009, or less than 1 percent of Google’s overall revenue. It’s easy to see why Google finally walked away from such a drop in the bucket.

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