Friday, September 26, 2008 Yahoo! still lacking a significant catalyst

[Posted on September 24, 2008 - 10:02 AM]

We're not sure whether this amounts to truly fresh news since people have been writing about it since at least Monday, but the Financial Times is reporting that Yahoo! Inc.'s [YHOO] revamped board has given the go-ahead to negotiate a combination with AOL LLC. At this point, there shouldn't be that much to talk about since the two were reportedly in discussions when Yahoo! was madly searching for alternatives to a deal with Microsoft Corp. [MSFT], or at least looking for some leverage in any Microsoft talks.

If the two sides are talking, the question becomes whether a deal really does anything for Yahoo!, or is just the combination of one large and struggling Internet company with another. At least one analyst thinks the deal would do little for Yahoo!, though it could depend on terms.

Cowen & Co. LLC analyst Jim Friedland says he believes it's possible Time Warner could exchange AOL for a 20% to 40% stake in Yahoo!, but that valuation is likely to be a major hurdle to getting a deal done. In a research note issued earlier this week, Friedland writes that such a deal would give Yahoo! incremental scale, but that a combination of two assets that are experiencing the same secular challenges would not yield material value.

If an AOL deal is not enough to shake Yahoo! out of the doldrums, what could? Eric Jackson, a Yahoo! shareholder who has been openly critical of the company, believes there's one way the company could possibly turn things around.

"The only thing that would do that is for the company to name a new CEO who's not [current CEO] Jerry Yang and not [president] Sue Decker who would look at this thing with a fresh set of eyes," Jackson said in an interview. "I bet the shareholders at Lehman wish they would have had someone with a fresh set of eyes rather than an insider over the past eight months."

Jackson said the only time he's been optimistic about Yahoo! in the past six months was when activist investor Carl Icahn announced he was staging a proxy fight for control of the company's board of directors. But with Icahn unable to garner a majority of seats on the board, Jackson said it will be difficult for him to enact major changes at the company or to get Microsoft back to the bargaining table.

"I'm pretty skeptical whether Icahn and his colleagues are going to push this forward and do anything," he said. "They can't push Microsoft. It's up to Microsoft whether they want to do something, and my guess is that Microsoft is going to wait for Yahoo!'s shares to collapse further and try to get it on the cheap." -- David Shabelman

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