Markets

Yahoo Buyers Hoping for a Takeover Bid May Be Disappointed

By Conrad Aenlle

Updated on: October 21, 2010 / 12:09 AM EDT / MoneyWatch

Yahoo's stock (YHOO) has been rallying amid talk that the website operator would be the object of a takeover attempt. Among the potentially interested parties, according to the Wall Street Journal, are AOL (AOL) and private equity firms like Blackstone Group (BX) and Silver Lake Partners.

The Journal piece stressed that no talks with Yahoo had begun, and it's unclear just who would be talking to whom about what. The deals being discussed most by spectators involve Yahoo first disposing of its Asian interests, which account for about 60 percent of its $21 billion market value.

A much smaller Yahoo would then be whipped into shape should a private-equity firm be the new owner, the thinking goes, or else be a more commanding presence in the Internet advertising business as part of AOL. Both scenarios seem plausible on the surface, but it's not clear how effective either would be, and basic default Yahoo has been in a rut for years. Buying the stock in the hope that a deal goes through may not be a wise move, therefore.

Such hopes have been dashed spectacularly before. Yahoo earned a reputation for playing hard-to-get in 2008 when it rebuffed a takeover attempt from Microsoft (MSFT) that valued Yahoo at more than twice its valuation today. That poor decision - as it turned out to be and as it was widely thought to be at the time - was the result mainly of the hubris of Jerry Yang, Yahoo's founder, who evidently thought that no price was high enough for his baby.

Yahoo's present management no doubt would view a takeover bid more rationally and coldly, although it still would demand a substantial premium over the current share price of about $16. Brian Pitz, who follows the stock for UBS (UBS), reckons any offer less than $22 to $25 a share would be declined.

Whether anyone makes a bid in that neighborhood or beyond remains to be seen. Based purely on Yahoo's business prospects, Pitz has a neutral rating and a $15 target price on the stock.

That may be generous. At its current price Yahoo trades at roughly 23 times earnings, and earnings aren't expected to grow that much next year. Buying Yahoo here offers the chance of a decent score if a bid emerges, but if one does not, you'll be stuck with the same company that has disappointed shareholders for years.