Analyzing Four Futures for Yahoo

by: Valuecruncher May 29, 2008 | about stocks: GOOG / MSFT / YHOO    

Valuecruncher

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

Things have gone pretty quiet on the Microsoft (MSFT) acquiring Yahoo (YHOO) front. With this break in the action we thought that it was worth putting some numbers around four potential futures of Yahoo:

  1. Our take of Yahoo as a standalone entity.
  2. Microsoft acquiring Yahoo at US$33 a share.
  3. Yahoo completing a search deal with Google (GOOG)
  4. Yahoo’s growth decelerates more quickly than currently anticipated.

We used the Valuecruncher interactive tool for analyzing the various scenarios. That means that anyone can follow the below links and play with our valuations – if you want to use different assumptions.

Yahoo Standalone

Our assumptions are revenues of US$5.75 billion in 2008 growing to US$7.25 billion in 2010. We used a flat EBITDA margin of 35%. We used a terminal growth rate of 5.75%. We calculated that using a present value calculation with the growth rate dropping from 12% in 2011 to 3.5% in 2015. We used a terminal capital expenditure number of US$600 billion. We used a WACC (discount rate) of 10.5%.

Valuecruncher Valuation Yahoo Standalone

This gives a valuation of US$20.07 – 26% below the current share price of US$27.00.

Microsoft Acquires Yahoo

We have not done a separate valuation of this option. The fact that Microsoft was prepared to pay in the US$33 range means that they have done their own merger analysis of the synergies that a combined Microsoft/Yahoo can generate. We will use US$33 a share as the valuation of this potential future of Yahoo.

Yahoo Completes Search Deal With Google

We agree with Henry Blodget – a deal with Google on search is not US$1 billion of free cash flow to Yahoo. It is more likely to be in the hundreds of millions of dollars range. For simplicity we have assumed that a search deal with Yahoo adds US$1 billion to the top-line revenues. We have kept all our other assumptions from the Yahoo standalone scenario intact.

Valuecruncher Valuation Yahoo Completes Search Deal With Google

This gives a valuation of US$23.44 – 13% below the current share price of US$27.00.

Yahoo Growth Decelerates More Quickly

Keeping the assumptions from the Yahoo standalone scenario intact but dropping the growth from 12% (in the Yahoo standalone scenario) in 2011 to 10% and falling to 3% in 2015 (using the same present value calculation) gives a terminal growth of 5%.

Valuecruncher Valuation Yahoo Growth Decelerates More Quickly

This gives a valuation of US$17.91 – 34% below the current share price of US$27.00.

Summary

Based on our analysis it seems very straight forward. Yahoo should have accepted the Microsoft offer. Play with our assumptions – what does your analysis say?

Disclosure: None

Related Articles

This article has 12 comments:

  •  
    May 29 09:52 AM
    Just an observation that I noticed with Yahoo. The format of accessing your email has changed to that of Hotmail which of course is own by Microsoft. Just sparked my curiousity as to why Yahoo would do that...I mean that may be a sign of things to come, but just thought I would throw that out there.
    Reply | Link to Comment
  •  
    May 29 11:12 AM
    Microsoft will not pay $33 for Yahoo! It will not pay even $31 now. Both prices probably included condition that best brains (including Yang and Filo) are remaining in company and marching to MSFT orders. Judging by results of famous meeting between Ballmer and Yang, this scenario is impossible. My forecast: if Icahn manages to take over, MSFT might offer something between $27 and $29. And Icahn will take it, because he will be desperate: there are no other buyers around. There is no guarantee though that MSFT will make even that offer. They'll be happy to see Yahoo! destroyed.
    Reply | Link to Comment
  •  
    May 29 11:20 AM
    No basis! Just using present value formula doesn't say anything about a company's past or future. That's like checking weather for next year! This is why we have stock market crashes! At best you can say, these may be the scenarios (which all of us know)
    Reply | Link to Comment
  •  
    May 29 12:00 PM
    Muddling Investor: I agree. Besides the original $31 offer was really $29 since it was half cash half stock. The final $33 offer was really $30. Microsoft never offered more than $30 cash for Yahoo. If there's a new offer, then it will be at $27.50 at best.
    Reply | Link to Comment
  •  
    May 29 12:13 PM
    I found this interesting, the whole premise behind this evaluation was based on what drove Yhoo to 18ish in the first place. Therefore I'm not sure any of this means anything. BUT, I realize we don't have anything to go on but Jerry's saying Yhoo is getting its act together and will be generating new sources of revenue and shareholder value. So, the real analysis that needs done is some insight into what Yhoo might be able to accompish on the upside, not trending what the past has already shown us.
    Reply | Link to Comment
  •  
    May 29 12:43 PM
    I just can wrap my mind around the assumption that a very experienced corporate raider like Icahn can be so wrong as to put himself in a position where he has to beg MSFT to buy YHOO for at least $29.
    Reply | Link to Comment
  •  
    May 29 01:10 PM
    OK, now add the $9-12 for stakes in Alibaba, YHOO Japan and Gmarket and you will get the correct values

    I am sure the folks at YHOO are quite happy with your little model valuation for their core biz. In fact, you seem to be tweaking your model to fit the downside prices seen in January.

    Reply | Link to Comment
  •  
    May 29 01:21 PM
    BigJames - Thank you for pointing to the omission on the valuation of their investments! I believe I had heard at one point Alibaba was what Microsoft really wanted. Maybe a sale to Microsoft and a dividend distribution, sounds like another option to me.
    Reply | Link to Comment
  •  
    May 30 01:58 AM
    Hi, shouldn't you be working for an investment house where you can earn big bucks like Toni iPhones in the warehouse Sacconaghi rather than be a writer, eh, you are already working in an investment house but moonlighting as a writer.
    Reply | Link to Comment
  •  
    May 30 02:47 AM
    very simple, you beg me to sell something to you, of course you have to pay the premium, if you can't pay take a hike pal
    Reply | Link to Comment
  •  
    May 30 07:52 PM
    I doubt if it will be different from $33. If it goes up, Microsoft won't be able to justify such a hefty premium, plus it will be seen as a desperate move. Going below $33 would hurt Yahoo's ego, and Microsoft as well since mkt would doubt its earlier offer. Depends on who is more desperate. Both parties need this merger for their good. This price will atleast assure an amicable merger.
    Reply | Link to Comment
  •  
    May 30 11:53 PM
    Great analysis - I hope the worst case scenario plays out since Yang and Filo so readily deserve it but we shall see. An outright board revolt and firing would be an even better alternative.
    Reply | Link to Comment
More Comments on YHOO »
Top Rated Comment Streams:

Numbers are net rating-

See all Top 100 »
More by Valuecruncher

Investment Resources
Money Management
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Mergers & Acquisitions
Internet Search
e-Commerce
e-Finance