Analyst Proposes New Way To Do Microsoft-Yahoo Merger
Just when all the chatter about a possible Microsoft/Yahoo (NSDQ: YHOO) deal seemed to have finally died down, Bank of America/Merrill Lynch analyst Justin Post suggests a new way to structure the partnership: merge the two companies’ online operations, but let Yahoo—not Microsoft—maintain the controlling stake. Here is more of what he says in the report, published this morning:
—Microsoft (NSDQ: MSFT) provides online operations and cash to the combined entity for a 49 percent stake. Consider giving Microsoft an option to buy additional shares in several years to acquire control.
—Value the combined entity at $26 billion to $46 billion, which assumes a $14 to $23 per-share valuation for Yahoo and an immediate $5 to $8 cash dividend to its shareholders.
—To make the deal to work, both companies need to come to the table acknowledging they need scale to compete in search and the only way to get there is to give up some control.
Post makes a strong argument for the operational benefits of a combined entity, after the jump...
Specifically, the new company could:
—Control 30 percent of the U.S. search market and the largest display-ad platform.
—Generate about $9 billion in 2010 revenue (versus Google’s $16 billion).
—Achieve expense reductions of $1.4 billion (half of Microsoft’s search related expenses could be eliminated).
—Generate operating margins of about 20 percent.
The report does make some fairly aggressive assumptions on the deal and the resulting company. For example, trimming half of Microsoft’s search expenses from the combined entity could inadvertently cut into some of the company’s muscle. In addition, when valuing the respective companies’ stakes in the new entity, different multiples of revenue are used for Yahoo and Microsoft (according to the returns generated from different revenue streams). Perhaps the largest hurdle to getting the proposed deal done is getting the two companies to agree on their respective valuations.
Still, the report does a good job of explaining why each company should do a deal under the proposed structure, or one similar to it. Post says “Microsoft has spent close to eight years nurturing OSB (the online services business) and has not reached critical mass…we believe OSB could be better off incubating within an entity like Yahoo instead of within a software business.”
Related StoriesPosted In: Media & Publishing, Companies, Google, Microsoft, Yahoo
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