Thwarting A Giant, Yahoo Efforts Shift To Finding Growth

Pete Barlas Mon May 5, 6:56 PM ET

Now it's time for Yahoo to put up or shut up.

After rejecting Microsoft's final $33-a-share takeover bid, analysts say that the Web's leading portal will have to meet its own lofty sales forecasts, partner with rival Google or sell an equity stake to a big outsider such as Time Warner to appease shareholders.

Microsoft threw in the towel on its three-month pursuit of Yahoo after the Web portal rejected a final offer of $33 a share over the weekend. That was $2 per share higher than Microsoft's original bid -- a $44.6 billion deal that represented a 62% premium to Yahoo's stock price at the time -- but fell short of the $37 a share that Yahoo executives say their firm is worth.

Yahoo shares fell 15% on Monday to 24.37, well above their 19.18 close the day before Microsoft's original offer.

That's better than the 33% or worse drop many analysts had predicted if the Microsoft deal fell through. Still, some analysts doubt Yahoo's stock can regain that lost value on its own.

"I'm of a group of people who basically don't believe that Yahoo can obtain those forecasts that they put out," said Larry Haverty, associate portfolio manager for the Gabelli Global Multimedia Trust. Haverty personally owns shares of Yahoo, and his firm owns Yahoo and Microsoft shares. "Right now, I'm skeptical that (Yahoo CEO) Jerry Yang will turn this thing around," he said.

Yahoo would have been better off accepting the new Microsoft bid, he says, than remaining alone and trying to meet its own forecasts, which call for a 25% growth in sales in 2009 and 2010 -- far above analyst forecasts.

Yahoo, which gets most of its revenue from online ads, has faced lackluster earnings and sales growth over the last two years. The company barely beat sales and profit forecasts in its first quarter ended March 31.

Yang, writing on Yahoo's Yodel Anecdotal blog May 4, said the Microsoft offer ignored Yahoo's potential for growth in text-based search and online display ads and other areas such as mobile and video ads.

"All of this reinforced our board's position that Microsoft's offer undervalued our unique global franchise," Yang wrote.

Some Yahoo investors seem to agree, says David Garrity, an analyst at Dinosaur Securities.

"Maybe there are some people right now who think Yahoo has got something up their sleeve near-term that will help jolt or move the stock higher," he said.

One of those things could be Google. On April 9, Yahoo launched a two week test of Google's text-based search ad system on Yahoo's portal in the U.S. Reports surfaced last week that Yahoo was close to signing a longer-term deal with the search king.

Google gets nearly all of its revenue from sales of search ads that show up near search results.

Neither Yahoo nor Microsoft has successfully challenged Google's dominance in search ads -- the fastest growing segment of the multibillion-dollar online ad market.

Pairing with Google could boost Yahoo's sales by up to $850 million next year, James Mitchell, a Goldman Sachs analyst, wrote in a research note.

Such a partnership also appears to be another reason why Microsoft walked away from the bargaining table.

The agreement would "fragment" Yahoo's search and display advertising businesses while opening the door to a "host of regulatory and legal problems that no acquirer, including Microsoft, would want to inherit," Microsoft CEO Steve Ballmer wrote in a letter addressed to Yahoo and released publicly.

Indeed, a day after Yahoo announced its test with Google, Sen. Herb Kohl, chairman of the Senate Judiciary Committee's subcommittee on antitrust, competition policy and consumer rights, said lawmakers would probe the partnership for any antitrust violations.

Still, the mere whiff of Google in Yahoo's future could play well for its stock, says Youssef Squali, an analyst at Jefferies & Co.

"The fact that Yahoo may be close to signing some kind of partnership with them tells me investors feel that there is real value there," he said.