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Should Microsoft Buy Yahoo for $53 Billion?

Should Microsoft Acquire Yahoo For $53 Billion?

The last time Microsoft offered to buy Yahoo — valuing it at $45 billion, Steve Ballmer hoped that some value could be created by combining their media assets.

As he said back then, “We have great respect for Yahoo!, and together we can offer an increasingly exciting set of solutions for consumers, publishers and advertisers while becoming better positioned to compete in the online services market. We believe our combination will deliver superior value to our respective shareholders and better choice and innovation to our customers and industry partners.”

Yahoo thought it was better off alone and Microsoft withdrew its offer in May 2008.

Since then, Yahoo’s stock price has risen substantially. But that stock price rise has nothing to do with an improvement in the performance of its core business and much to do with factors that are beyond my understanding.

To be sure, analysts are excited about the value of Yahoo’s non-core assets. Indeed, Victor Anthony, managing director for Internet media at Topeka Capital Markets, told the New York Times that Yahoo is worth between $50 and $52 a share.

Under CEO Marissa Mayer, Yahoo’s core business has suffered declining revenues — down 2.2% in 2013 – and is worth $10 a share in Anthony’s estimation. Its 24% stake in China’s Alibaba he reckons is worth $30 a share and Yahoo Japan adds another $7 a share. I am not sure where the other $5 a share in Anthony’s calculation comes from.

What surprises me is that these assets have been on Yahoo’s books for years before Mayer took over and she has done nothing to change their value. If markets are truly efficient, these assets should have been fully reflected in Yahoo’s stock price before Mayer started work as its CEO.

Moreover, her tenure has not boosted Yahoo’s share in its core business – instead its US digital ad market share fell from 6.8% to 5.8% in 2013, according to eMarketer. Yet Yahoo’s stock has soared under Mayer’s tenure.

If Microsoft were to acquire Yahoo, it could solve its succession problem by getting Mayer to replace Ballmer. Unfortunately, such a deal would fail at least two of the four tests of a successful acquisition:

1. Industry attractiveness: PASS?

An acquired company should participate in an attractive industry. Yahoo’s digital display ad business is large and growing. eMarketer estimated that display ads on PCs and laptops grew about 18% in 2013 to $17.7 billion. But display advertising is far less attractive than other categories such as mobile advertising — up 81% in 2013.

2. Better off: FAIL.

The acquirer and target should be able to compete more effectively after the deal closes. After all, Yahoo’s market share in digital advertising is expected to fall to 5% by 2015 and Microsoft’s even smaller share is also forecast to fall according to eMarketer.

Moreover, neither firm has demonstrated the ability to come up with market share winning innovations in key areas such as social networking or mobile advertising. And while the combination would add market share, the added revenues are likely already well-capitalized in that purchase price.

3. Price greater than net present value: FAIL

The price paid for an acquisition should be less than the present value of its future cash flows. Paying a premium over the value of assets that are already highly inflated — such as Alibaba and Yahoo Japan — it is hard to see how Microsoft would be able to earn back the 30% price premium. On the other hand, that $53 billion represents a fairly modest 16% of Microsoft’s market capitalization.

4. Integration: PASS?

A target company should be sewn into an acquirer in a way that appears seamless to customers. If Mayer became Microsoft’s CEO after the deal, her management style might fit just fine. After all, Yahoo just adopted the stack ranking approach that Microsoft used for years before recently dumping it.

None of this seems to matter to the stock market. After all, since Mayer took over at Yahoo in July 2012, its stock price has risen 150% — despite its shrinking core business.

If Microsoft were to acquihire Mayer, perhaps her presence would levitate Microsoft’s stock the 17% needed to pay for the deal.

Source: Forbes

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