Yahoo-ooooooo

Hello,

Phil, just wanted to speak to Yahoo, I took a very brief look at it. Looks like their earnings will be more than 50% off this year, largely on account of advertising sales. Yahoo continues to lose search volume and thus add market share to Google every quarter. I would not invest in Yahoo today based on their current business model.

The upside on this one would be the event of a Google of Microsoft buy out of their lesser cousin. If you guys recall, Microsoft almost bought Yahoo last year for $35 a share, Jerry Yang wanted $36 and the deal fell apart... however, activist investors including Mark Cuban and Icahn tried to seize the board and effect a sale, unsuccessfully.

I took a look at Microsoft's books to see how liquid they are and how easily they could gobble up the $15bn Yahoo. Microsoft has over $20bn in cash equivalent assets, that's a lot my friends. However, much of it is in mortgage backed securities, corporate debt and other assets that are probably valued pretty low right now. Good and bad from the Yahoo acquisition perspective. Good because I am sure Microsoft is marking those assets to market and in good times their $20bn in cash equivs is much much higher. Bad because they aren't going to want to sell or can't sell any of those assets right now given markets and depressed valuations, why take the loss? However, they do have access to the Paper Money Market and their stock price has hung in there giving them ability to tap stock equity in a big transaction.

Bottom line, I would not rule out a Microsoft acquisition of Yahoo. Today, Yahoo is valued at a 35 price to earnings ratio. That is probably high, but perhaps Microsoft is willing to pay a premium over it to control more of the internet and take on Google.