Yahoo's Advisory Fees: Maybe Yahoo Should Have Been the Buyer

(MoneyWatch)  Ironically, for all the Yahoo trash talk you hear, the company's revenue, profits, and shareholder equity are all on a six month rise compared to last year. So why are people so down on it? Might it have made more sense for Yahoo to buy Microsoft's search business?

To be fair, staving off a takeover bid is expensive work. The New York Times' DealBook pointed out that Yahoo spent $36 million handling Microsoft's takeover offer and the resulting proxy fight.

A big part of that money likely flowed to Goldman Sachs, Lehman Brothers and Moelis & Company, the financial firms that have been working with Yahoo as it considered Microsoft's takeover offer and other strategic alternatives. Skadden Arps Slate Meagher & Flom has been providing Yahoo with legal advice.

Aside from a loss of cash, the other downside is further distraction of the board and management. When people in charge focus more on corporate machinations, they have less time to make the business better.

The knee-jerk reaction of all too many, including me at times, has been that Yahoo is foundering. But let's look at some numbers and be a tad more critical in evaluating not just the company, but shareholder reactions. Consider how Yahoo did during its first six months this year compared to last:

• Revenue was up by $246 million, or almost 7.3 percent
• Gross profit was up by nearly $121.6 million, or 6.2 percent
• Net income more than doubled, from $303 million to $673 million
• Both basic and diluted earnings per share more than doubled
• Cash and cash equivalents were up almost half a billion dollars
• Stockholder equity jumped by over $2 billion

Yahoo is still the most frequently visited Web site according to Alexa.com, and it has great brand equity. And apparently Yahoo has even picked up a little bit of ad spending that formerly went to Google.

However, the stock market game is one of emotion and perception, not of rational consideration. Look at the chart, at the top, of Yahoo's stock performance (ironically from Google Finance). From the beginning of February 2008 to today, this is about as close to a straight line down as you're going to find in the real world, and the slide started when Microsoft said that a deal was off. People got disappointed that they weren't going to see a sudden chunk of money. As the board remained adamant, that displeasure built into a slide.

I'll absolutely grant that Yahoo's direction has seemed confused and that the flight of key employees out of the company shows an underlying weakness in management. Google continues to grab more online advertising revenue market share. But Yahoo is a company with a huge brand, big following, lots of cash in the bank, and resources. Google has some big weaknesses, and to write off Yahoo is insane.

Here's an idea: let Yahoo buy Microsoft's online business. Although Microsoft sees online advertising as its future, the company is too stodgy at this point and faces too much public hostility. Instead, it can concentrate resources on improving existing core products, to protect the profit generators, and then use all the money it saves to go after something new that would lead the market and not follow it. As Yahoo has proven itself in the market more adept at online search and advertising, it can better direct challenging Google and, maybe with a change in upper management that would focus attention and resurrect investor confidence, start pulling itself out of a slump.