- status quo (a $100B market cap by 2010?)
- merger with eBay
- merger with Viacom
- acquisition by/merger with Microsoft
- taken private
- sale to AT&T
- can Google buy Yahoo!

But what about a merger with CBS? Sit down folks…

Yahoo! Is Undervalued

The following is something I’ve touched on before, from the NYT’s Bits blog by Saul Hansell:

At $24.09, Thursday’s closing price, Yahoo has a market capitalization of $32 billion. When Jeffrey Lindsay, an analyst for Sanford C. Bernstein looks at the company’s $2 billion in cash, along with its holdings in Yahoo Japan, Alibaba (the Chinese e-commerce firm) and other entities it doesn’t run, he comes up with a value of $13.24 a share. That leaves a value of $10.51 a share for the actual business of Yahoo, making the value of Yahoo’s core business about $14 billion, or 7 percent of Google’s $200 billion market value.

Yahoo! Many Options

Pontifications over Yahoo! are commonplace here, admittedly, but as the world wide web’s largest media company, we sure are interested. Marketwatch.com mentions that a MSFT/YHOO hookup would create distractions, WSJ’s Kara Swisher says no way, Henry Blodget just wants to speculate.

Is Yahoo! is the Apple in CBS’ Eye?

Incidentally, at a net value of $14B, Yahoo! is worth pretty much what CBS is worth these days, net of cash. CBS is valued at $16B, has about $2B of cash (though its enterprise value is more, at $23B, since it also has $7B in debt - enterprise value is simply market cap less cash plus debt).

Should CBS and Yahoo! Merge?

What does it mean that Yahoo! and CBS’ net value are close. Well, nothing. But it is worth nothing that when CBS was a part of Viacom (before being spun-off), Viacom was always a likely acquisition/merger suitor. Viacom remains a potential marriage partner for Yahoo!, but Yahoo! has gone from the world’s largest media property to much more with the acquisition of Flickr, Delicious, and numerous ad platforms (Right Media and Blue Lithium). We argued that Yahoo! might want to spin-off its Network business to raise cash and unleash shareholder value…

Yesterday, CBS Leslie Moonves told the investors at Citi’s 18th Annual Global Entertainment, Media & Telecommunications Conference: “Our stock is undervalued.”

Frankly, with about $15B in annual sales, the man is not wrong.  With

- the world’s largest TV network (CBS),
- the second largest radio network (after Clear Channel Communications)
- the largest billboard business (CBS Outdoors)
- one of the more impressive online networks, the CBS Audience Network, which basically launched this year,

the man has a point. Value is in the eye of the beholder, mind you, so wait, there’s more.

Management Team

Last year, Leslie Moonves wisely looked outside the Tiffany Network and hired Allen & Co. investment banker Quincy Smith to become CBS Interactive’s CEO.

Smith is part banker, part Web guy (he was at Netscape when Netscape was a force). Smith in turn lured Patrick Keane to become CBSI’s Chief Marketing Officer. Keane has all of the online marketing DNA one needs, coming from Google. Smith also recruited Michael Marquez, formerly of Yahoo!’s Corporate Development team.

Smith and Marquez’ list of acquisitions, namely Wallstrip, Last.fm, along with business development deals with Digg, combined with their “distribution over destination” mantra have set the stage for CBSI and CBS’ explosive growth.

In fact, meanwhile at Yahoo! they too have embraced “distribution over destination” so there is a joining of the minds there.

But, as the lines between old and new media blur and each company faces considerable competitive forces:

- CBS from a much larger NBC (parent is GE), News Corp., Viacom, Walt Disney and Time Warner
- Yahoo! from MSFT’s MSN.com, Google, as well as News Corp.’s FIM/MySpace, Facebook, etc.

it is not a bad idea for them to consider what a merged entity would look like.

Let me be clear, the investment adage is “buy low sell high” - not “sell low” so admittedly, since both Yahoo! and CBS’ stock prices being at or near 52-week lows, this might not fly with either board. But, it’s not like one company is down and out or anything; both are doing great in the marketplace but are facing macro-challenges and facing difficulties in getting Wall Street excited.

As such, a joint entity is not implausible. What’s more? Well, with Terry Semel gone as CEO (he remains the Chairman of the Board) and Sumner Redstone not exactly plotting a succession plan, this allows for:

- Mr. Moonves to become Chairman of the joint Company’s Board and remain CEO of CBS
- Jerry Yang to return to being Chief Yahoo
- Quincy Smith can become CEO of Yahoo! and remain CEO of CBSI - for Yahoo! technically is CEO-less, even though Yang took over the job.

And assuming they are interested in such a premise, Keane, Marquez and the rest of the brass at CBSI can fill in some of YHOO’s recently departed ranks.

In turn, CBS/YHOO would definitely become the world’s best positioned media company - period. If you think about it, Yahoo! has frequently flirted with the content business, but it has never prevailed. Sometimes, the argument is to buy, not build… in this case, Yahoo! would be merging, instead… and CBS ensures its success and supremacy as marketing, advertising, media and content continue to transform and - to quote Quincy - become fully interactive.

What Would the Combined Unit Look Like?

For starters, Yahoo! needs to determine what to do with their stakes in Yahoo! Japan, Alibaba etc. But those are all workable in a deal. They could be spun-off if need be to raise more cash, which all companies can use to make acquisitions, buy back shares (especially since the stocks are close to their lows). Saul Hansell’s post quotes Jeffrey Lindsay, an analyst for Sanford C. Bernstein, as saying that about $13 of Yahoo! $24 is really a holding company. Over 1.32B shares outstanding, that means those spin-offs would generate $15-20B in cash for shareholders. If the company wishes to retain those proceeds for investment, it adds to the war chest.

Depending on these admittedly important details, the CBS/Yahoo! company would have about:

- $4-20B of cash on hand,
- a combined market cap of $30-50B (depending on the issue raised above)
- revenues of over $20B
- would have an awesome arsenal of assets.

From a purely financial engineering perspective, it’s worth noting (again) that CBS is currently trading at 1x Revenues. Yahoo! meanwhile is trading at 5x. This merged entity will approximate the P/S somewhere around 2-3x… so right there, there will be a boon for investors. The same applies to profits, to varying degrees.

Technology vs. Media

Bear in mind, search is important and Yahoo! should continue to focus on that, but focusing on yesterday’s growth engine is foolish when Yahoo! is already well positioned for the next growth engines in online advertising (namely video and display/banner ads). Partnering with CBS - which is home to a lot of great content - gives Yahoo! an edge with regards to distribution and monetization. The former because of both companies’ “distribution over destination” ideology and the latter because Yahoo! has the best sales force in online media and CBS’ has arguably the best sales force in offline media.

Conclusion

We do not, for one second, think this will happen… but the implications would create a very powerful entity that would push News Corp., NBC, Walt Disney, Viacom, Time Warner, Google, Microsoft back and bring together a team that can certainly create a lot of shareholder value.

Any takers?

Disclaimer: Long YHOO stock.