MarketWatch: Yahoo's troubles spur new talk of a buyout

Yahoo's troubles spur new talk of a buyout
Shares off more than 40% since Oct.; takeout potential keeps Street interested
By John Letzing, MarketWatch

Last update: 3:37 p.m. EST Jan. 30, 2008


SAN FRANCISCO (MarketWatch) - When Florida-based shareholder Eric Jackson mounted a campaign last year to spur management changes at Yahoo Inc., he says it was done with the aim of helping the company thrive as an independent entity. These days, however, Jackson isn't sure that's possible anymore - and he's not alone.

Jackson said he has no intention of buying Yahoo soon, even after its stock dropped to a four-year low on Wednesday. "You don't want to be catching a falling knife, and Yahoo's been falling for some time," Jackson said.

"The company hasn't shown it can make tough decisions," Jackson said. If the current state of affairs continues, he said, "I think the best option for shareholders will be a buyout."

Yahoo shares were down more than 8% to $19.02 by Wednesday afternoon, and the stock has fallen more than 40% in the past three months - giving rise to fresh speculation that potential buyers may swoop in, and that shareholders may press Yahoo's management to seriously entertain their offers.

That talk is fueled by continued troubles at the firm. Late Tuesday, it posted a drop in fourth-quarter profit alongside an outlook for 2008 that fell short of Wall Street analysts' expectations. See related story.

Speculation about a Yahoo buyout has swirled since last year, when Microsoft's (MSFT:
Microsoft Corporation interest in such a deal was reported. Buying Yahoo would theoretically place Microsoft as significant competitor in the Internet search market, where it has so far lagged behind both Yahoo and Google Inc.

Microsoft, which has thriving software businesses that could fund a much deeper foray into Internet markets, has yet to actively dispel rumors it is considering an acquisition of Yahoo.
Other possible acquirers of Yahoo include private equity firms, or even larger media companies aiming to expand their Internet presence.

But Cowen & Co. analyst Jim Friedland said potential buyers may want to think twice.
"There's no question that the weakness at Yahoo will reignite interest, but I think there are a lot of good reasons, if you forget about price, for media companies and Microsoft to avoid buying Yahoo," Friedland said in an interview.

Those reasons include an integration with Microsoft that would likely be protracted and messy, and a lack of current assets at Yahoo that media companies might be interested in.

And while Friedland said that taking the company private with a private equity acquisition "is probably the most feasible option," Yahoo's size, coupled with current credit market woes, make that scenario unlikely.

Citigroup analyst Mark Mahaney argued in a note to clients Wednesday that despite its poor outlook and declining share of the U.S. search market, Yahoo still holds value for potential acquirers - which is one of the only things propping up its current share price.

Mahaney downgraded his rating of the company's shares to buy from hold, writing that, "what makes [Yahoo] a hold and not a sell are its potential to be acquired."

Credit Suisse analyst Heath Terry echoed that view in a separate note, writing that, "While we believe there is meaningful value at Yahoo... for shareholders, we believe it may take an acquirer to realize that value."

John Letzing is a MarketWatch reporter based in San Francisco.

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