Yahoo-Google: Analysts React: Short-Term Gains Mask Long Term Sacrificies; MSFT-YHOO Still?
This story was written by Joseph Weisenthal.
You already know how the market reacted to yesterday's news: Shares of Yahoo got slammed, as an ad deal with Google (NSDQ: GOOG) was seen as a poor substitute to a full or partial sale to Microsoft (NSDQ: MSFT). Even after yesterday's swoon, the stock is off another 4 percent today to around $22.50the lowest its been since Microsoft's initial offer back in February. So as dreams of a sale fade, what does the Google deal mean for an independent Yahoo (NSDQ: YHOO). Analysts are busily sounding off this morning:
-- Ben Schachter, UBS: In the short term, yes, this is a boost to cash flow, so that's good (Yahoo estimated yesterday it would contribute an incremental $250-$450 million to operating cash flow). But as Schachter asks: "At what long-term cost?" Despite insistence from Yang and Decker that Yahoo remains a "must buy" the agreement makes the company less relevant in terms of offering a full spate of advertising options. And if you thought that this was the end of the saga, Schachter disagrees: "We continue to believe that, at some point, MSFT will acquire all of YHOO. Unfortunately, for all of us that are beyond tired of the constant news flow and speculation around a possible MSFT/YHOO deal, this GOOG/YHOO agreement will not put us out of our misery as we still think MSFT needs YHOO." He also wonders about a comment that Decker breezily made during the Q&A about helping Google with display stuff on their own properties: "Sue Decker's somewhat coy comments about the potential for GOOG and YHOO to work together in some manner on display ads should raise a lot of eyebrows as it begs a whole new set of questions and spurs more speculation."
-- Jim Friedland, Cowen: Incremental revenue, yes. Strengthened position? Not so much. Even if monetization improves, the deal doesn't change the fundamental picture at Yahoo, as a company losing share, user engagement, facing a weak economy. He also notes that regulatory approval may not be a slam dunk: "We believe Microsoft will immediately begin to lobby in Washington against the deal." (No doubt on that.) And the possibility of Microsoft-Yahoo at some point? "A deal is less likely than it was a few weeks ago, but not impossible. Microsoft holds most of the cards and could hold out for a lower price. After all, its bid has dropped from $40 to $35 to $33 (via $31) over the past year."
-- Jeff Lindsay, Bernstein: This deal only represents $3 of incremental value per share. For one thing, Yahoo can not eliminate Panama to realize cost savings (note: the company said on yesterday's call that cost savings were not part of th equation) and the outsourcing agreement doesn't apply to all of its inventory. And it's not necessarily over for Microsoft: "Yahoo! management clearly believes that this development finally marks the end of Microsoft's interest in Yahoo! as detailed in a press release from Yahoo! after yesterday's close. We are not so sure." He also wonders if all this talk about how it's just about the long tail of search is just posturing for the upcoming regulatory review. Also, for Google he estimates the deal is worth about $15 per share.
-- Mark May, Needham: Key takeaway: Yahoo's estimated cash flow gains may be overly ambitious. They're not a sure thing (note: they're also pretty wide). Again, the deal diminished Yahoo's relevance in the space.
-- Ross Sandler, RBC: This is all good from the perspective of the Googleplex. The termination of Yahoo-Microsoft discussions is good, and there's potential for $700 million in incremental cash flow once the deal is up to speed. Shares of Google are up over 2 percent today.
-- Mark Mahaney, Citi: Yahoo's cash flow estimates are realistic based on Citi's own analysis. Google may be the big winner.
By Joseph Weisenthal