The ongoing Yahoo! Inc. (NASDAQ: YHOO) merger saga with Microsoft (NASDAQ: MSFT) or its potential sidebar deal with Google Inc. (NASDAQ: GOOG) and the fight with Carl Icahn has been covered about every which way that could be imagined. But what we wanted to look into was how this actually compares to what various valuation scenarios could look like after the company reports earnings and more importantly after its most widely awaited annual meeting in history since the year it came public.
The next best thing to owning a crystal ball that would tell you the future is to run basic analysis on the possible outcomes over the next 20 to 35 days. We have run various estimate scenarios for Yahoo! stock and come up with three scenarios to determine an implied value upon various outcomes. Many would argue that intrinsic values are always near the current price of the stock, but we are trying to derive the likely forward valuations based upon the outcomes of the three scenarios. The base scenario is around the current efficient market theory and the other two are the more extreme scenarios. We admit that there are more than three scenarios, but these are probably the most logical and are in descending order rather than any order as being the most likely.
Scenario 1: YHOO $30.00
Scenario 1 could come in the form of either of two sub-scenarios, and both could generate up to this $30.00 value. Sub-Scenario 1 is where Jerry Yang has a great realization and decides to admit the errors of his (and board’s) decision to go it alone. In this scenario he is able to bring Microsoft (NASDAQ: MSFT) back to the table and secure a reduced price of $30.00. He’d still have future question marks, but he wouldn’t go down as the largest wrecker of value. Sub-Scenario 2 is one where Carl Icahn is able to win all of his efforts, kick out management AND secure a revised deal in some form or fashion with Steve Ballmer as has been telegraphed. Icahn’s board would also have to begin a rapid process of monetizing all of those added properties that Yahoo! has been able to put together itself and might require the favored approach of Icahn in a very leveraged share buyback. Regardless of which sub-scenario were to occur, this implies that the underlying economy for web properties and for their underlying business partners does not get much worse than today.
Scenario 2: YHOO $22.00
This second scenario is one where things continue sort of on an as-is basis today and implies something similar to a +/- 15% range above and below that level depending upon the bias of the market. This also fits into the perfect market or efficient market theory if you are inclined to believe in that notion. This scenario is one where Jerry Yang and board members win some of their initiatives and lose on some initiatives to Carl Icahn. It would signal that Yang and friends are forced to capitulate at least some and are forced to make some changes whether they want to or not. That is also somewhat the current consensus from our discussions with industry people and the traders we have spoken with. Does that "consensus opinion" mean anything? No, because we are still two weeks or more from even seeing all the preliminary data and likely 3-weeks or 4-weeks away from knowing an outcome and from knowing if either side will accept the voted outcome. This price range still includes an embedded call option for the possibility of future actions such as deals, takeovers, and/or value enhancements. This price range also is more indicative of a choppy economy rather than one that is going to get far worse. At $22.00+, YHOO trades with a current forward multiple of 45.8 based on stock prices of today. We also looked at the AUG-2008 put and and call options with a $2.00 directional bet for either in determining a portion of our +/-15% range on either side.
Scenario 3: YHOO $17.00
This scenario is an implied value based upon the severe drop in the markets AND is geared around the basis that Jerry Yang and kids win all or most of their initiatives after the board meeting and just stay on their current path alone. Under this scenario Carl Icahn is not able to get anything done and he has to go away to just eat losses from this entire exercise. Also Microsoft (NASDAQ: MSFT) would have entered into more than just discussions with another competitor like Time Warner Inc. (NYSE: TWX) via AOL or even doing a deal with Barry Diller and IAC/InterActiveCorp. (NASDAQ: IACI) on a post break-up basis, meaning they did a deal elsewhere and signal absolutely no hope for ANY future Yahoo! tie-up. This also assumes that Panama and other issues continued to lose some ground to Google (NASDAQ: GOOG) and assumes that the remaining search engine competitors and competing web properties maintain their current market share in each field with some competitors making additional inroads on gaining market share at Yahoo!’s expense even if Google’s share keeps goes higher. For a forward valuation and assuming the estimates for 2008 are actually met, then YHOO trades here (at $17.00 hypothetical price) with a forward price/earnings ratio of about 35. That is still expensive for a lower-growth Internet stock. Google’s current forward estimate is 26.5 based upon today’s prices and YHOO trades with a current forward multiple of 45 based on $22+ stock prices of today. This scenario could happen even if the economy stays choppy, but would still imply serious valuation premiums to Google and to the overall market even if Yahoo! meets its estimates. This scenario also means that Wall Street has taken away any potential deal and the embedded call option premium is taken entirely out of the share price; and it essentially removes extra premiums for other possibilities and implies a multi-year road to recovery led by unresponsive management.
We acknowledge that these are subjective scenarios and also very subjective price values, but they are based on actual data and on assumptions that are in-line with many. There is no crystal ball that can be applied here. Of all the Wall Street analysts, the average price target is roughly $24.50 to $25.00 for a one-year target as of today. There are many higher and many lower price targets, but there are very few targets under $17.00 and very few above $30.00. We also looked at shorter-dated and longer dated call options and put options to try more mathematical calculations for six months out. Either way, there are many variables that could prove any of these scenarios equally true or false.
Jon C. Ogg
July 16, 2008
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