Do we Yahoo? Indeed we do

Benj Gallander and Ben Stadelmann
Friday, June 19, 2009

The market meltdown presented investors with a fantastic opportunity to buy major league companies at highly discounted prices. The problem was, with panic engulfing the globe, it became difficult for a huge cross-section of the populace to look beyond the darkness towards the light that will eventually transpire.

No question, we too were caught up in some of the noise and should have placed more money in stocks. Unfortunately, hindsight is historical possibility. Besides, we still think a double dip might be in the cards.

One outfit purchased during the chaos was Yahoo. With coffers filled with more than $3 billion in cash, and next to zero debt, the balance sheet was calling our name. Plus, the firm is virtually always profitable, and although its reputation has been somewhat diminished by more cutting-edge websites, it remains the busiest portal on the web.

Many investors became discouraged by this company, for very good reason. Ex-CEO and co-founder Jerry Yang pulled a glaring bonehead move when Microsoft came a-courting early in 2008 with an offer of $33 per share.

Yang wanted more money than the $47.5 billion Microsoft had placed on the table. Greed can kill, and after the offer vapourized, Yahoo’s stock price tumbled from around $30 to below $10. Ouch!

Ultimately, Yang was given the boot and replaced by Carol Bartz, the former chair and CEO of Autodesk, where she’d had a great deal of success. Under her stewardship, revenues increased over 14 years from $285 million to better than $1.5 billion.

She’s a stickler, having previously served for 11 years at Sun Microsystems, where she was VP of worldwide field operations. This week, she was joined by new CFO Tim Morse, who held the same position at Altera.

The firm that she inherited is not without problems. Yahoo depends on advertising revenues, and the recession has forced spending cuts in this realm. That knocked down net income this quarter by 78 percent year over year to $118 million.

That was one of the triggers for Bartz to cut another 700 employees, the third round of layoffs in 14 months, with 2,500 workers having already bitten the dust. Then, last month, Microsoft unveiled its Bing search engine, which will likely encroach on the 20 percent market share that Yahoo holds. Google is the unabashed leader at around 64 percent.

Rumours persist that Microsoft and Yahoo are still negotiating the purchase of the latter’s search engine. Nor can an acquisition of the entire outfit be ruled out. Former AOL CEO Jon Miller has reportedly been considering a bid in the $20-$22 range for the whole tamale.

However, if an agreement is reached with either of these parties, while it would still likely be at a substantial premium to the current price — not to m ention our purchase price of $11.11 last October — it will almost certainly be worth much less than our target price of $32.74. The company remains on our Buy list.