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Disk and Tape Square Off

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Yahoo shares take a hit on Monday

By Juan Carlos Perez , IDG News Service , 05/05/2008
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Yahoo's stock lost significant value on Monday, the first day of trading after Microsoft's decision over the weekend to give up on acquiring Yahoo.

Yahoo's shares closed down 15 percent at US$24.37, after dropping as low as $22.97 during the day.

While Wall Street seemed displeased that Yahoo and Microsoft didn't consummate their merger, at least Yahoo's shares didn't retreat to their $19.18 pre-acquisition-bid price.

"It was expected that the stock would be down meaningfully today. It's also not surprising the stock is up fairly substantially from where it was prior to the offer's announcement," said financial analyst Troy Mastin of William Blair & Co.

As Mastin sees it, the stock managed to avoid a freefall to its pre-bid levels because Yahoo's management has outlined plans that could increase the company's value.

"This potential transaction seems to have catalyzed Yahoo's management team to try to unlock some shareholder value or some hidden profitability in their business model they've been slow to try to unlock before," Mastin said.

One such move could be the deal that Yahoo is reportedly trying to cut to outsource part of its search advertising business to Google. That would significantly boost Yahoo's revenue and cash flow. Another value-creating possibility would be the re-emergence of Microsoft as a Yahoo buyer in the coming months, he said.

It's hard to know if an outsourcing deal with Google would be a wise move in the long term, since it would give Google more power in search advertising, a market it dominates. As such, the Google deal puts Yahoo in a challenging position, having to balance the short-term interests of its shareholders with long-term considerations, Mastin said.

The Google deal could potentially give Yahoo the lift it needs to push its share price to $33 or higher, said Mastin, who rates Yahoo's stock as "market perform," meaning he expects it to perform approximately in line with the broader market over the next 12 months.

Microsoft's last offer for Yahoo was $33 per share, or about $5 billion more than its original offer, but Yahoo declined it, saying it wanted $37 per share, according to Microsoft.

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