Wednesday, July 29, 2009

Yahoo-Microsoft search deal brings "boatloads" of backpeddling (YHOO, MSFT)

AlphaNinja - This morning, Yahoo (YHOO) and Microsoft(MSFT) announced their much-anticipated search agreement. Microsoft shares are up 1% and Yahoo shares down 10% (and falling further), as the market had been expecting an "up-front" payment to Yahoo of $500million to $1billion, but was left with none.

Details from the announcement:

“This agreement comes with boatloads of value for Yahoo!, our users, and the industry, and I believe it establishes the foundation for a new era of Internet innovation and development,” said Yahoo! Chief Executive Officer Carol Bartz

-Maybe it's me, but I don't think Carol's choice of the word "boatload" was random...She previously has said “If there’s boatloads of money and the right technology involved, would we do a deal? Sure.”

Well, here we are with the search deal, and she's backpeddling, citing the "boatloads" of "value" as opposed to "cash" or "profits" that the market was hoping for. Yahoo shares had nearly doubled of November lows, and this search deal was much of the hype driving that rise. There should be no surprise to see investors selling shares in a major way.

Also from the release:

-->>At full implementation (expected to occur within 24 months following regulatory approval), Yahoo! estimates, based on current levels of revenue and current operating expenses, that this agreement will provide a benefit to annual GAAP operating income of approximately $500 million and capital expenditure savings of approximately $200 million. Yahoo! also estimates that this agreement will provide a benefit to annual operating cash flow of approximately $275 million;

Ok, great -->> $500million operating income is about 23cents per share after tax - adding that to 2010/2011 EPS (earnings per share) estimates gets the estimate to 65-85cents? Yahoo trades at $15.50 right now, a rich multiple to those earnings, and that's why the stock could continue to plummet. As it looks right now, Microsoft has struck an incredibly shrewd deal.

We're already getting a US senator out on the wires saying this deal needs "careful scrutiny" -->> What? Google has nearly 70% search market share, Mr. Senator. Where were you then?


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