DealZone

Yahoo’s deal with Google: Band-Aid

November 4, 2008

So Yahoo and Google scaled back the terms of their search advertising deal in what looks like a last-ditch, attempt — at least for Yahoo — to get it past U.S. regulators.

Some analysts called it the Band-Aid deal, while others said it smacks of desperation.

Frost & Sullivan’s digital media global director Mukul Krishna said the revised terms were “more of a Band-Aid than the extensive surgery” Yahoo needs.

Barclays Capital’s Douglas Anmuth had a similar take: “We have long viewed the search outsourcing deal as a Band-Aid-not-a-panacea for Yahoo, but compromised terms or an outright rejection of the deal would likely force Yahoo to consider other strategic measures.”

Those “other” measures are a merger of Yahoo and Time Warner’s AOL unit, or Yahoo shareholders’ ultimate dream: Microsoft coming back to woo Yahoo.

Eric Jackson, the dissident Yahoo shareholder who sold his fund’s 3 million Yahoo shares in September after being convinced regulators would nix the Google deal, said: “You just gotta hope that the love bug bites Microsoft again and they want to come back.”

Sanford Bernstein analyst Jeffrey Lindsay said he expects Yahoo’s deal with Google to falter and for Microsoft to come back next year with a bid of around $20 per share. That may not sound too bad considering Yahoo is trading at $13, but remember that the last Microsoft offer had been for $33 a share.

Meanwhile, Needham & Co’s Mark May outlined six scenarios in his research note this morning:

  1. Regulators approve Yahoo-Google deal with no additional conditions, which would likely cause short-term jump in Yahoo shares and add no more than $80 million to $100 million to Yahoo’s earnings before interest, taxes, depreciation and amortization in the first year. Remember, Yahoo had said it was expecting a cash flow boost of between $250 million and $450 million.
  2. Regulators approve, but with stipulations, which could lead the companies to call the deal off, or if they stick with it, even smaller financial benefits.
  3. Deal terminated, Yahoo sells search to Microsoft — but May says that would be a bad long-term strategy for Yahoo because it wouldn’t add much to earnings.
  4. Yahoo-Google deal terminated, Yahoo and AOL merge. May says this deal would be problematic and not good for shareholders, listing integration challenges and cultural differences among other issues.
  5. Microsoft buys all of Yahoo, which is what shareholders seem to want, but does Microsoft want it? May estimates Microsoft might offer between $20-$25 a share for all of Yahoo, but Yahoo’s board would probably not want to negotiate at that price.
  6. Yahoo-Google deal terminated, Yahoo continues status quo. May calls it the “worst possible scenario” of the six he laid out.

The thing is, Yahoo just might choose to do nothing if the deal with Google doesn’t get through regulators. But if Yahoo does that, “stakeholders will want some blood, and Jerry (Yang, Yahoo’s CEO) will be a target,” Frost’s Krishna said.

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