A full search-outsourcing deal between Yahoo (YHOO) and Google (GOOG) would increase Yahoo’s value by more than $5 a share, says analyst Bob Peck of JP Morgan Stearns. Bob’s logic:
– [Deal Would] Boost Yahoo! Search Revenues by 17%, Operating Cash Flow By 23%. While revenue from this test will be minimal, we estimate that if Yahoo! were to outsource its entire search business to Google for the entire year, Yahoo!’s search revenues would increase by 17%. We arrived at this estimate by assuming a TAC rate of 90%, applying Google’s monetization metrics, and the further assumption that Yahoo! will maintain its affiliate relationships. However, if Yahoo! were to outsource its search operations to Google, we believe that Yahoo!’s affiliates will “eventually migrate” to Google.
– Incremental +$5 Per Share of Value. In addition, assuming a reduction in R&D expenses and capex, we estimate that operating cash flow would increase by 23%, resulting in $5-$6 per share in incremental value. This would be a clear positive for Yahoo!, as well as for Google which would experience a $4.5bn increase in gross search revenues ($450mn net) in addition to cementing its leadership position in search.
– Nearly Half of Online Ad Revenues Would Flow Through Google. We note that a full Yahoo! / Google relationship would give Google more than 90% share of the search market. Furthermore, this would imply that approximately 45% of online advertising revenues would flow through Google.
Different assumptions would get you to different numbers, but we think Bob’s assumption is directionally correct. As we argued yesterday, we think that, at the very least, the Yahoo-Google test is a brilliant counter-move that bolster’s Yahoo’s argument that Microsoft (MSFT) should pay more than $31 a share.
Disclosure: Henry Blodget has long-term positions in YHOO and MSFT.
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