Is Yahoo vulnerable to takeover?

If the recent removal of its chief executive and chairman Terry Semel was supposed to quash speculation as to the future of web icon Yahoo, then it only partially worked. After a brief share price rally, more cautious trading has ensued, and the ongoing chitter-chatter as to the future of Yahoo has, if anything been fuelled further. It seems that everybody is waiting to see what the next move will be.

For the truth is that Yahoo is vulnerable, and has been for some time.

The one-time darling of the early dot-com days had seemingly managed to ride out the impact of the subsequent market downturn, and had positioned itself firmly as a destination of choice for the web's user base.

Then Google happened. Or, more to the point, Google muscled in on areas that Yahoo had previously relied and banked on. The search engine business was only part of the story, of course. The real money came in the online advertising sector, and that's where Yahoo has, for a good year or two, been beaten and seemingly comprehensively outperformed by its sprightlier, seemingly unstoppable competition. And while Yahoo has launched a salvo or two of its own in that sector this year, it has being seen as too little, too late for its increasingly dissatisfied investors.

Semel's tenure was not one of failure. Certainly in the years after his appointment as chief executive and chairman in 2001, Yahoo enjoyed brisk business. Revenues, traffic and profit have dramatically increased over the course of his leadership, and financially, the company isn't in a bad place. While his hideously generous bonus packages - over $70m in 2006 alone - has caused loud dissent among shareholders (particularly given Yahoo's relative performance in its market sector), Yahoo is now established as a profitable and broadly known company. And given how some of its contemporaries have fared in a similar time frame, that's not an insignificant feat.

Yet it's not that or the balance sheet per se that's making Yahoo vulnerable. It's the share price. From the end of 2005 through to mid-2007, it's tumbled by the best part of 30 per cent, and this is at a time when its competition is thriving. Or, more to the point, the share price is struggling in a market that's not depressed.

Semel, who earned praise and plenty of financial reward for guiding Yahoo through the hard times, seemingly couldn't pull the same trick when the market was booming. And that suppressed share price, coupled with growing dissatisfaction at a strategy that seems to trail in Google's wake (and that's when said strategy is communicated at all), has meant that Yahoo may be ripe for the picking.

After all, the numbers don't lie. The market currently values Google at four times the price of Yahoo, and the gap is likely to get bigger.

Jerry Yang

The appointment of Semel's replacement has done little to douse the flames. Jerry Yang, who founded Yahoo back in 1994, has assumed the role of chief executive, and this is widely believed to be a holding position, rather than a long-term strategy. In fact, in some quarters the appointment of Yang has been seen as the most obvious signal yet that Yahoo is going to end up on the block (although, as you'd expect, some take the opposite view).

After all, when Yang was steering the firm, it was in the days of the early, rapid growth of the internet. It is, after all, easier to head up a booming firm in a booming market, and many are openly and perhaps understandably, wondering whether he has the skill to guide a more mature, troubled multi-billion company.

The key argument appears to be that Yang is inherently tied to the history of a firm that desperately needs new thinking and fresh ideas, Both investors and analysts have been vocal in voicing their need for a new strategic direction along with new blood, and are querying whether Yang can deliver that, not least because he's hardly the returning saviour. Yang has remained on Yahoo's payroll for the duration of Semel's occupancy of the top spot.

With time not on his side, Yahoo's new chief executive will do well to match Semel's six years in the chair. That said, his supporters point out that he's remained committed to Yahoo over the past years, both as a public face for the company, and as someone interested in the business. And thus far, he's making the right calming noises.

The more interesting move is perhaps the elevation of Susan Decker to the role of president, and her non-elevation to the chief executive role. For a long time Decker was believed to be the heir-apparent to Semel when he stepped aside (and certainly she seemed to be the popular choice among investors, given her rating as one of America's most promising executives), and while her elevation has been welcomed, there's still suspicion that she's been snubbed. That said, her broadened role in the restructured company could yet be pivotal in deciding Yahoo's future.

Potential buyers

If Yahoo is, as it seems, vulnerable to some form of takeover or merger, then who is likely to be in the frame? The current share price at the time of writing values the firm at $40bn, and that's hardly small change, even for the major private equity players in the market. It all but rules out an entirely cash deal.

The rumour mill on this one thought started earlier this year of course, when reports surfaced that Microsoft was considering a merger or takeover of sorts. This would make clear strategic sense, not least because both Microsoft and Yahoo are facing the same common enemy, and the combined force of two such major names in technology would pose a real test for the seemingly unstoppable Google.

Yet Microsoft moved quickly to calm such rumours back in May, arguing that their current combined web products were garnering more numbers than Yahoo's (also MSN Search trails Yahoo's by some way), and on the advertising side, pointing to its $6 billion (£3.1 billion) acquisition of aQuantive earlier this year.

However, that does still gloss over the fact that, in spite of such investments, Microsoft's share of the online market still lags behind Google's by some distance as well. Thus, the joining of two major players and the combining of their search engine numbers still seems to make tangible business sense, not least for being able to point a generous number of people in the direction of the combined business's numerous respective services. It is therefore unsurprisingly that in the light of the Yahoo boardroom shuffle, Microsoft's name keeps popping up.

Another interesting theory that's gather moss at some speed is that Rupert Murdoch's News Corporation is circling Yahoo. This too has clear strategic advantages. Murdoch already owns the web's premier social networking site, MySpace, and this - according to some - could be leverage in any possible deal. It's speculated quite heavily that one such outcome could be that Murdoch sells MySpace to Yahoo in exchange for stock alone. On current values of both, that would give News Corporation around a quarter stake in Yahoo, and given the combined force of Murdoch's other media assets, it would make a huge media giant even more formidable.

Unsurprisingly, nobody has been willing to go on the record about any such deal, but of equal interest, surely, is the fact that nobody has come out and denied it either. Believe some, and the talks are already ongoing.

Over at Time Warner, still with AOL as a major part of the asset register, there's further food for thought. AOL is one of the premium consumer internet names of old, and like Yahoo, has significant challenges ahead of it. Pooling the resources of both would create, again, a sizeable force in the online marketplace.

On the downside, the Time Warner/AOL merger is still fresh in the memories of many stockholders, and it would be understandable if there was a real reluctance to again align the business with an internet name. Google, maybe. But Yahoo?

The list of suitors doesn't stop there. Further names that are cropping up in American analysts' reports include two communications giants, AT&T and Comcast. As both are prominent providers of high speed broadband services in the US, the power of the Yahoo brand (something that BT has already leveraged in the UK to sell broadband services) and the obvious synergies with their own work won't have gone unnoticed. Whether either would want to commit such a heavy investment to an acquisition such as Yahoo is unclear, particularly given the recent expenditure involved in rebuilding the AT&T business.

Panama

It is entirely possible that Yahoo may fend off its various suitors. Certainly it has some irons in the fire itself, and many parties are looking closely at the performance of the Panama search advertising system. It only launched back in February, and while thus far only anecdotal accounts exist of the platform's performance, the murmurings have been positive to date.

Meanwhile, amidst all the speculation, Yang has made noises that seem to indicate it is business as usual for Yahoo, leading one or two to suspect that he will try and avoid any potential sale.

Realistically, if Yahoo's share price continues to be challenged, then potential suitors, at the point where the price is right, are likely to come out of the woodwork and attempt a hostile takeover.

Don't bet against the waters at least being tested before the year is out. Also, don't bet against the power of the Microsoft chequebook, either. A MySpace/News Corporation tie up appears to have legs, too...

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