The Zacks Analyst Blog Highlights: Yahoo, AT&T, News Corp, Verizon Communications and Google

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Sep 19, 2011, 09:30 ET

CHICAGO, Sept. 19, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Yahoo Inc (Nasdaq: YHOO), AT&T Inc (NYSE: T), News Corp (Nasdaq: NWS), Verizon Communications Inc (NYSE: VZ) and Google Inc (Nasdaq: GOOG).

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Here are highlights from Friday's Analyst Blog:

…And the Drama Continues for Yahoo

The latest rumor is that Yahoo Inc (Nasdaq: YHOO), which remains one of the biggest names in Internet business and online search, is seeing a growing number of bids for the whole or a part of its business.

The suitors appear to be a number of private equity funds, including Silver Lake Partners. A consortium of Yahoo shareholders could also be interested in buying out the company, according to media reports. Others with an interest in Yahoo appear to be AT&T Inc (NYSE: T), News Corp (Nasdaq: NWS) and Verizon Communications Inc (NYSE: VZ).

The news comes on the heels of a principal shareholder, Daniel Loeb (5.2% stake in Yahoo through the Third Point LLC fund) calling for a resignation of a number of members of the board. The shareholder is apparently looking to create opinion against the board, as well as founding member Jerry Yang, who turned down Microsoft's $30 a share offer a couple of years ago.

While the current share price would have investors lamenting this loss, Yang could not have known at the time that Yahoo would move from one failure to another. In fact, CEO Carol Bartz's firing last week and her subsequent resignation from Yahoo's board smells of punishment for not possessing the magic wand that could turn the company around.

Problems and More Problems

A decade ago, Yahoo was a prime Internet company, with a market cap of around 10x what it is today. The company's search business was doing extremely well at the time, which is possibly the reason for its complacence. As a result, when Google Inc (Nasdaq: GOOG) emerged as a competitor with superior technology and innovation, Yahoo was increasingly pushed out of the search business.

Google went on to take a two-third share of the market, relegating Yahoo to the number two position, with less than a fifth of the total market. Yahoo's leadership was caught napping, as the company proved unable to match the level of innovation and creativity that Google displayed.

The company instead went on to sign an agreement with Microsoft that would save costs, but essentially turn over its search business to it. Yahoo hoped to collect a majority share of the earnings thus generated. However, monetization of Microsoft's efforts has fallen below expectations. While it may not yet be time to write off the partnership, it is unlikely to be very lucrative in the near term.

Yahoo has for long maintained its leadership position in the display ad market. Bartz intended to build on this strength, but other companies, such as archrival Google and upcoming social networking company Facebook had already done much more homework.

Therefore, despite her efforts, Yahoo's position in the space continued to shrink, with eMarketer projecting that Facebook would emerge as market leader by the end of the year, with an 18% share of the market. Yahoo would drop to second position with a 13% share, followed by Google at 9%.

With the company's core business getting out of control and management struggling to remain in the saddle, other problems started cropping up. The most significant of these was with respect to Yahoo's Asian assets.

The company has a 39% stake in Alibaba, a Chinese e-commerce company, as well as a sizeable share of Yahoo Japan, in which Japan-based Softbank is the only other major shareholder. While many analysts and market watchers have said that most of the company's current market cap is due to these assets, their exact valuation remains extremely unclear.

Alibaba recently sold off Alipay (a key asset) to a company headed by its major shareholder, Jack Ma. The company was apparently able to carry this off without Yahoo's knowledge or consent. A recently-altered Chinese law that does not allow foreign ownership of payment platforms went very conveniently in Jack Ma's favor.

Although subsequent arrangements have resulted in a share of profits accruing to Yahoo, the deal was not completely favorable. The turn of events at Alibaba seems to indicate that there could be sudden and significant change in the value of the asset that is beyond Yahoo's control.

Yahoo is also not completely at peace with Softbank, which is a concern, since the companies have stakes in both Yahoo Japan and Alibaba, so a bond between the two could have been of value.

So What Would an Acquirer Want?

As the uncertainty surrounding Yahoo's Asian assets mounts, sources say that some potential acquirers are willing to buy the company only after these assets are offloaded. It is unlikely that this would happen any time soon. Particularly so since some board members, such as Yang, have said that there is no urgency to sell off the company or any part of it. However, news reports suggest that Yahoo has for some time been listening to anyone with a good offer.

Yahoo's core services, such as its email, general news, sports, finance and entertainment remain the most popular in the U.S., still attracting the largest section of the public. However, market research points to the fact that people are staying on Yahoo properties much less than they used to in the past. This is naturally a concern, since it indicates that Yahoo content or its presentation appears to be lacking appeal, meaning that advertisers are probably already losing interest.

Judging from past trends, Yahoo would do well to sell the business right now. Whatever needs to be done to turn it around, Yahoo obviously will not be able to do it. A potential acquirer, on the other hand, could augment an existing line of business or expand capabilities.

It could also kill off the main products, which does not seem likely, since there is some value in them and competitors have not made bids as yet. In any case, there would be fresh minds at work, which seems to be the need of the hour.

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