BUSINESS BLOGS
BUSINESS BLOGS
category: business
03 Jan 2008

Yesterday, Think Equity suggested that fears over the AT&T/Yahoo! deal were overdone:

TE Internet William Morrison thinks the Street is over-estimating the potential hit from the loss of the current AT&T deal, which provides per-subscriber revenue for their jointly marketed Internet access service. He says that some Street estimates put the revenue at risk from Yahoo’s broadband access business at $300 million to $600 million. But he contends that the AT&T deal generates only $200 million in annual revenue now out of an estimated total $275 million total access business.

I am curious, seeing how so many business development deals lead to corporate development deals and vice-versa, I wonder if this round of negotiations will set the stage for a potential inquiry from AT&T about an outright acquisition of Yahoo!

Bear in mind that every time we consider Yahoo!’s many options, which include:

- status quo
- merger with eBay
- acquisition by/merger with Microsoft
- taken private
- can Google buy Yahoo!

Someone comes along and wonders if AT&T (or Comcast) will make a move for Yahoo!  I personally think Yahoo! can do just fine by itself, but while $35B in market capitalization is rich for many firms (Walt Disney, Comcast, Time Warner, eBay, News Corp., Viacom, CBS), for a behemoth like AT&T it is not.

AT&T is worth a cool $250B, or 8x Yahoo!’s market cap.

AT&T’s valuation is in the same ball park as Microsoft’s, the other main party usually called on to eventually make a serious run at Yahoo!.

MSFT’s market value is an impressive $330B, or 10x Yahoo!  The reason why I think Yahoo! and AT&T would both fancy owning Yahoo! is because once upon a time, Google was worth 1/8th and 1/10th of AT&T and MSFT respectively, but today Google is worth $200B, or 80% of AT&T and 67% of MSFT.  I know what you’re thinking: Google is in ascendancy whereas Yahoo! is not.  Well, not so fast there.  If you consider the fact that display advertising is set to accelerate in 2008 and Yahoo! will benefit most, and a number of other variables such as Google plateauing in search advertising, then you have to adhere to Warren Buffett’s mantra of buying where you get a margin of safety.  Say what you want, but buying Yahoo! at a market cap of $35B is closer to “buy low, sell high” than buying Google at a market cap of $200B, no?

This begs the question: can AT&T actually buy Yahoo!  $35B is a lot of money.

AT&T only has $2B in cash on its books, whereas MSFT has $20B.  But AT&T carries some $60B in debt and is as such no stranger to debt.  MSFT has little, if any debt.

But MSFT generated less than $60B in revenues whereas AT&T clocked in $100B in revenue.  Any way you dice it, AT&T can underwrite an acquisition of Yahoo! if it wanted to.  AT&T is also looking at moving into web and video more, and clearly, no one is as well positioned for those two areas as Yahoo!

Of course, then it’s a matter of will Yahoo! shareholders approve the deal?

Disclaimer: Long YHOO