As the market corrects and consolidates, do not forget about adding some Yahoo! to your portfolio. The stocks is down big and has not moved despite a positive article written in Barron’s a few weeks ago. It might even be a takeover candidate.
There were even reports a few weeks ago that Microsoft executives have explored the idea of buying a stake in Yahoo!. Heck! Why not buy the whole company? When you dig into the numbers, it may not be a bad idea:
Yahoo! Market Cap. = $ 49.0 Billion
Less: Yahoo! Japan Stake = $ 12.4 Billion
Less: Alibaba (Chinese Portal) = $ 1.4 Billion
Less: Cash – Debt = $ 2.0 Billion
Enterprise Value = $ 33.2 Billion
Yahoo! is expected to generate 2005 EBITDA of $2.0 billion and 2006 EBITDA of $2.6 billion. A 16.6x multiple for 2005 and 12.8x multiple for 2006—not that expensive for a high growth company.
Microsoft has failed in almost every Internet business it has attempted to enter. Yahoo! and Google have destroyed them. And Barry Diller, the great programmer, now owns ask.com, and he plans to enter the search businesses in a big way.
Microsoft still has $34 billion in cash after the huge cash distribution to shareholders last year so it could pay cash. Yahoo! also generates margins that are better than many of the new businesses (outside of its core software business) that Microsoft is investing in. Yahoo! is also a cash generating machine like Microsoft.
While Silicon Valley despises the Redmond-based giant, a Microsoft deal could lead to a mass employee exodus, but the Yahoo! franchise name has already been built. In addition, as Yahoo!’s stock price suggests, Wall Street has not been overly enthusiastic about its performance recently.
Bill, this might be your last opportunity to become an Internet company. Let’s see a hostile takeover.
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