Here's one to chew on. As I recall, this guy also thinks Nasdaq is heading for 1500.
Yahoo! Could Make Sense as an eBay
Target, Numbers Show
By Peter Eavis
Senior Columnist
realmoney.com
12/20/00 6:59 PM ET
How much would you bid on eBay (EBAY:Nasdaq - news - boards) for a large Web
company reliant on ad revenues -- say, Yahoo! (YHOO:Nasdaq - news - boards)?
If such an auction isn't taking place on eBay's site, it could be getting considered in
eBay's highest echelons. In fact, Detox's big prediction for 2001 is that eBay will buy
Yahoo! for between $20 and $30. Both stocks closed at $27.94 Wednesday, Yahoo!
dropping 6 cents and eBay slipping $4.38, or 14%.
Market rumors about Yahoo! were deafening Wednesday. According to the chatterers,
the Web giant was supposed to be on the verge of profits warning and a management
shake-up. Other idle banter said Yahoo! is getting bought. All this talk could be guff --
at least in the near term. And when asked whether there was any truth to the
tittle-tattle, a company spokeswoman said Yahoo! doesn't comment on rumors and
speculation. eBay declined to comment.
However, when you run the numbers, the notion that eBay is soon going to buy
Yahoo! is extremely persuasive.
Reaching
As a site, Yahoo! is an amazing creation. But the company is almost certainly going
to suffer sagging revenue growth in 2001 amid a grinding slowdown in Internet ad
spending, the company's main source of revenue. Investors have bid the Santa Clara,
Calif.-based company's shares down 87% this year, underlining how widespread the
skepticism has become. And with its stock this soft, Yahoo! is extremely vulnerable
to a takeover.
Strategically, an eBay purchase of Yahoo! would make a ton of sense. eBay would
get to market its services to Yahoo!'s 175 million registered users, gain wider global
reach and absorb Yahoo!'s auction sites, thereby eliminating overlap.
But if eBay is going to be the buyer, it'll have to move fast. The faster eBay's stock
falls -ý it's down 26% this week alone -- the quicker it gets debased as an acquisition
currency. And the crucial consideration in a Yahoo! deal will be price. In this
increasingly sober investing environment, investors are going to frown darkly on any
acquisitions that aren't first-year accretive (in other words, deals that don't add to
per-share earnings in the first year of operations of the new combined company).
With its still-lofty valuation, eBay could do a rapidly accretive merger with Yahoo! In
fact, with eBay's stock around $28, the online auctioneer could buy Yahoo! at any
price up to $40 and still hit estimated 2001 per-share cash operating earnings. (For
this piece, cash operating earnings are operating income with noncash expenses
added back in.)
Big Numbers
Some back-of-the-envelope numbers. Even at $40, a level Yahoo! stock isn't likely to
see again soon, Yahoo!'s market worth is $25.3 billion (using Yahoo!'s likely share
count at the end of next year). With its stock at $28, eBay would have to issue 984
million shares to buy Yahoo!, bringing the combined company's total share count to
1.28 billion. Yahoo! is expected to make around $500 million in operating earnings
next year, and eBay $150 million. Combining those totals and dividing by the new
share total, you get 51 cents per share, which is what eBay might be expected to
make in 2001 cash operating income. Needless to say, the deal looks better and
better as Yahoo!'s share price comes down, which it has been doing with some
regularity recently. Clearly, eBay would be foolish to make a bid above $30.
Of course, if eBay stock keeps getting crushed, or it reports disappointing profits, a
deal looks less likely. And if Yahoo! ends up preannouncing and making a lot less
than $500 million in cash operating income, it'd be harder for eBay to make the deal
accretive. (Yes, possible synergies are being left out in these calculations, but so is
the need to get a first-year return equal to eBay's cost of capital.)
Why wouldn't AOL Time Warner, the only other, large-cap, profitable Net-focused
firm, buy Yahoo!? Of course, it may try. But it'd be a real push to make such an
acquisition accretive, since AOL (AOL:NYSE - news - boards) has a far lower cash
operating income multiple than eBay. Rough calculations show AOL couldn't make a
Yahoo! acquisition accretive above $13, assuming AOL's stock stays around $37 --
and that's hardly guaranteed in this climate. |
