As everyone digests yesterday’s extraordinary news around Microsoft’s withdrawal of their Yahoo bid, the big rumor around the valley is that Yahoo is frantically trying to negotiate a deal with Google to outsource search advertising and get it announced before the markets open tomorrow.
Yahoo-Google?
It’s not clear that Google still wants to do such a deal now that the immediate threat of a Microsoft/Yahoo deal is gone. The reason – the almost certain regulatory review (even Congress has taken note). And even if they are still willing to talk, Yahoo has lost the lions share of negotiating leverage. That means a lower revenue share, a shorter term deal, etc.
If Yahoo and Google reach a deal, it’s possible they could at least argue for a case that Yahoo’s value should increase to $37/share (but the markets won’t buy it): based on analyst projections, Yahoo could increase cash flow by $1 billion or more by outsourcing, and increase revenue per thousand search queries to as high as $90 from the current $40 or so. Combine that with massive headcount reductions (Yahoo won’t need their search marketing employees any more, possibly 2,000 employees), and Yahoo could have short term bottom line gains of well $1.2 billion or more/year.
With a trailing P/E of almost 40, That extra cash could, theoretically, boost their market cap by more than enough to reach their goal of $37/share.
That’s the theory anyway.
In reality, even if a deal is announced, the markets will factor in the risk of regulatory veto, as well as the long term negative effects of giving away the search marketing business to their biggest competitor.
And Yahoo’s true market value today remains in the $19/share range, or about $26 billion, now that the Microsoft crutch has ben removed. A good chunk of that – $10 billion or so – is actually from their Alibaba and Yahoo Japan holdings.
So Yahoo and Google may do a deal or they may not – but either way it isn’t going to help Yahoo’s share price as much as they hope.
Angry Shareholders
We also expect Yahoo to announce their delayed annual shareholder meeting early this week, and actually hold it as early as late June. When it’s announced, shareholders have ten days to propose an alternate slate of board members. Microsoft says they are sitting on the sidelines, but a group of angry stockholders may now emboldened enough to make their own effort to change company management.
To say that shareholders are angry is an understatement. They made it clear to anyone who’d talk to them that they would be more than happy with Microsoft’s $33/share final offer. Legg Mason, Capital Research, T. Rowe Price and others all reportedly strongly wanted the Microsoft deal to happen.