A wave of joy washed through the Yahoo faithful this morning: Google had called! Yahoo would outsource search to Google in exchange for a pile of cash! Yahoo was saved!
As Yahoo shareholders and fans, we’d be glad if Yahoo were saved–or at least were able to extract a far fatter take-out price–but we’re missing something here.
Saul Hansell at the Times runs some numbers and estimates that, based on Ask’s $3.5 billion outsourced search monetization deal with Google, Yahoo might be able to command some $40 billion in Google payments over five years. That seems like a preposterously huge number to us–Microsoft is about to buy the whole company for only 10% more than that–but let’s say Saul’s right and Google is willing to help save Yahoo by writing a check for, say, $10 billion up front.
What happens then?
One possibility is that Yahoo bribes its existing shareholders into blocking the Microsoft deal by paying a massive one-time dividend. That would nice for existing shareholders–and might shut them up for a few minutes–but once the money was gone, it would be gone–and the stock would drop accordingly. Also, since Yahoo will simply have received an upfront payment of future revenue, today’s shareholders would have been bought off with cash that, by all rights, should have belonged to future shareholders (not the most effective means of permanently raising your stock price).
Another possibility is that “there would be a pot of money that could help finance a bid for Yahoo by a private equity firm or a media company.” The theory here, we guess, is that a potential private equity buyer would immediately be able to pay off $10 billion of the debt it took on to buy Yahoo by swiping the $10 billion now sitting in the company’s bank account (or, alternatively, pay itself a $10 billion dividend). Of course, since the market usually doesn’t ignore $10 billion cash piles sitting on balance sheets, the private equity firm would likely have to increase its bid price for Yahoo by about $10 billion prior to taking it over. This would be nice for Yahoo’s current shareholders, but it probably wouldn’t encourage bids from private equity firms, who would just have to come up with an additional $10 billion of financing (and who, in any case, would just be taking an advance on future cash flow).
The most compelling possibility, presumably, is that Yahoo could take that $10 billion and use it to buy back its own stock, thus shrinking the share base and driving the rest of the shares skyward. The trouble with this plan is that Microsoft’s bid has already driven the stock skyward, so the shares are 48% more expensive than they were on Friday. So Yahoo would presumably have to commit to using the $10 billion to buy back stock in the future, once Microsoft walked away and the shares cratered again. And it would have to hope that, once it had done this, the stock soared–or else Microsoft would just come right back and make another offer again.
Bottom line: If Yahoo concludes that the best way to maximise future cash flows is to outsource search to Google, then it should outsource search to Google. The idea that this move will somehow save Yahoo from Microsoft seems half-baked.
(Saul, by the way, thinks outsourcing search to Google is a terrible idea, and he makes a lot of good points…)
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