Monday, May 05, 2008

Yahoo (NASDAQ:YHOO): Colour on news

Several firms are out with comments on Yahoo (NASDAQ:YHOO) after Mr. Softee pulled its offer over the weekend:

- Piper Jaffray notes that while Microsoft officially pulled the bid to acquire Yahoo!, there are still many pieces and players that need to sort out before the dust truly settles. First, there is the obvious possibility that Yahoo! and Microsoft do hold further talks to potentially reach an agreement. As detailed in their 5/2 industry note on the proposed deal, Piper continues to believe that Microsoft needs help to create a formidable online advertising presence and believe Yahoo! still makes the most sense as an acquisition. Currently, Microsoft lags at third or lower in many major online advertising spaces: search, display, third party, and video; a Yahoo!acquisition would propel Microsoft into or near the lead in many of those categories. Firm believes there is still about a 30% chance a deal occurs despite the formal bid retraction. Separately, they believe there will be pressure from Yahoo! shareholders to quickly engage in other partnerships to maximize value including a search outsourcing deal with Google and/or an AOL merger. Maintains Neutral on YHOO stock with tgt lowered to $23 from $31.

- ThinkPanmure (what an earth of a name is this?! What happened to good old ThinkEquity?) notes that in what may likely to go down as one of the more destructive decisions for shareholder value in the history of Internet stocks, Yahoo!'s management and Board rejected Microsoft's final offer of $33 per share. To say they are disappointed is an understatement—dispirited is more like it. Firm expects most investors to feel the same and for YHOO shares to fall to fair value based on the company's stand-alone growth prospects, which they estimate at $20 or roughly 40% below Microsoft's last bid. At $20, YHOO shares would trade at an average of 9x 2009E EBITDA and 20x 2009E FCF/share.

Rating is lowered to Sell (from Acc) with tgt going to $20 from $31.

- Citigroup is lowering their rating to Sell saying YHOO stock will go down materially today. YHOO's stock was at $19.18 when MSFT made its bid. But they believe it's very unlikely YHOO will trade within 10% of that: 1) Major Indices (NASDAQ, S&P 500) and other major Internet stocks are generally up 3%+ since then; more importantly, 2) Strategic options like Search Outsourcing to Google and an AOL partnership have clearly been developed since then; and most importantly, 3) YHOO will remain in play, either on the belief that MSFT will come back (a la Oracle-BEA) or another bidder will emerge (News Corp-).

In Citi's opinion, YHOO has gone from an Event Stock to a Scenario Stock. They simplify to Three Scenarios. 1) Back To Business As Usual: With '08 remaining another major investment year and the company likely a sustainable low-double-digit EBITDA grower warranting a Media Multiple - 45% probability/$22 Stock = 8X '09 EBITDA; 2) Major Strategic Alternative: Google Search Outsourcing, AOL or MySpace Partnership, Asia Asset Sale & Substantial Buyback - 40% probability/$26 Stock - biggest upside is likely Google Outsource, which could add $1B+ in cashflow worth $6 per share to YHOO; & 3) MSFT-YHOO Deal Happens: 7% solution found and deal happens at $35 -- 15% probability/$35 Stock. Weight average these and YHOO now worth $26. Hence the Sell.

Notablecalls: I suspect MSFT is playing hardball with YHOO here. Yahoo will get sold to MSFT in the next 6 months as major holders like Legg Mason's Bill Miller will push the deal through. Buying YHOO @ $22 leaves ample upside w/ no significant downside risk. An ideal trade many hedgies will put on as soon as today. My gut tells me YHOO will trade over $23 level today.

I'm a buyer here around $22 and change.

1 comment:

cramermutebutton said...

I love this. very outside the box perspective on this. risk v reward is great here.