Judgment Day Nears In Yahoo's Pursuit Of Higher Microsoft Bid

Apr. 21, 2008 (Investor's Business Daily delivered by Newstex) --

Will Tuesday be Yahoo's Independence Day -- or its Battle of Little Bighorn?

Analysts say Yahoo's first-quarter earnings results could be the Web portal's last hope to remain an independent company or wrangle a higher bid from suitor Microsoft ( MSFT).

Substantial growth from Yahoo's (YHOO) Web-search and display-ad businesses for the quarter that ended March 31 might also provide a silver lining for investors looking for some upside from the foundering company.

"They have every incentive imaginable to meet if not exceed estimates," said David Garrity, an analyst at Dinosaur Securities. "There is a lot riding on the numbers."

In recent quarters, Yahoo has been struggling with growth and expense issues. The company has also been unable to challenge Google ( GOOG) as the leading seller of text-based search ads, the biggest segment of the multibillion-dollar online ad market.

But Yahoo remains defiant. The company has twice rejected Microsoft's bid to buy the company for $31 a share. The value of the deal, $44.6 billion when announced on Feb. 1, has slid to about $42 billion because of a drop in Microsoft's share price.

Yahoo's latest rejection April 7 followed a letter from Microsoft Chief Executive Steve Ballmer two days earlier that hinted at a hostile takeover if Yahoo doesn't attempt to negotiate a sale before April 26.

Yahoo seems bullish about its performance. Last month, the company took the unusual step of reaffirming its revenue forecast for the first quarter and the year. It also gave a rosy forecast for the next two years.

For its first quarter, analysts expect Yahoo to report a profit of 9 cents a share.

Revenue minus traffic acquisition costs -- money it pays to Web site partners that carry its ads -- should hit $1.32 billion, say analysts polled by Thomson Reuters. Yahoo says it expects between $1.28 billion and $1.38 billion for the first quarter.

A year ago, Yahoo reported per-share earnings of 10 cents and ex-TAC revenue of $1.18 billion.

Yang Looks To Make Statement

Yahoo Chief Executive Jerry Yang called the firm's forecast a "testament to our ability to perform in line with our expectations despite the current economic environment." He added that "Yahoo is worth well more as a stand-alone company than the value offered in (Microsoft's) proposal."

But even a strong quarter won't be enough to hold off Microsoft, says Youssef Squali, an analyst at Jefferies & Co. He and many Yahoo investors believe the Web company's weak performance in recent quarters has made a sale inevitable.

Not everyone shares that view.

Yahoo is still the Web's leading portal and can grow in a robust online ad market, says Martin Pyykkonen, an analyst at Global Crown Capital.

"If they have a strong quarter, then their argument to stay independent holds some water," he said. "This is not a case where you have to make the argument that Yahoo has to be bought; it's still a company with scale."

In the event of a sale, Yahoo will need to show some strong growth if it hopes to wring any more money from Microsoft, Squali says.

"If they don't report an 11% or 12% gain in revenue growth, which is about where consensus is, then they weaken their case against Microsoft and there is no reason for Microsoft to come in and pay a bigger premium," he said.

'Calling Yahoo's Bluff'

Pyykkonen agrees, saying Microsoft probably won't sweeten its bid unless Yahoo demonstrates some financial upside.

"This is almost like a poker game with Microsoft calling Yahoo's bluff," he said. "But if Yahoo has a good quarter, maybe they can get Microsoft to ante up with one or two dollars (more per share)."

Just what kind of hand Yahoo is holding is unknown.

A year-over-year increase in revenue could mean Yahoo is having some success with its display and search ad businesses.

Garrity says the expected dip in profit likely comes from work the company has been doing to bring its display and search ad businesses to one platform to give better access to advertisers.

"It indicates margin pressure, and they had already indicated that was happening," Garrity said, referring to Yahoo's reaffirmation of its first-quarter numbers last month.

Revenue and costs might rise, says Squali, as Yahoo integrates recent acquisitions such as Blue Lithium, a service that allows advertisers to reach more targeted audiences, and Right Media, an online ad exchange that matches ads with space on Web properties.

"We think you are going to see year-over-year double-digit growth in display advertising," Squali said, "because those businesses were not part of their business model in Q1 '07.

But their operating expenses have gotten bloated because these acquisitions are not as profitable as Yahoo, so that brings down the margins."

Analysts say Yahoo will also reap some revenue boost from its revamped Web search ad business, known as Panama. The service competes with rival services from Microsoft and Google, the leading seller of online text-based ads.

On April 9, Yahoo said it was conducting a limited test of Google's search ad service on its U.S.-based Yahoo.com portal.

Yahoo's pairing with Google isn't necessarily a sign that it's dissatisfied with the results from Panama, Garrity says.

He said the deal with Google was intended mainly "to get a rise from Microsoft and to satisfy shareholder concerns that they are willing to try alternatives such as outsourcing search to Google."


Newstex ID: IBD-0001-24618713

Originally published in the April 21, 2008 version of Investor's Business Daily.

Source: http://money.cnn.com/news/newsfeeds/art ... 618713.htm