Yahoo! for Sale?

After a meteoric rise, Yahoo! (Nasdaq: YHOO) seems to have fallen back to earth. Following the dot-com bust, the share price ran up from less than $10 in 2002 to more than $40 at the start of 2006. However, it is currently trading at about $27 a share, trailing Google (Nasdaq: GOOG) in the hearts and minds of Web users and investors. This has led to speculation over Yahoo!'s future and whether it can remain an independent entity. Analysts and the press have thrown in their two cents, and we at the Fool have also given it thought. Who are the likely suitors, and what is the chance of a successful deal? More importantly, what success could they find once the dust (and hype) has settled?

Yahoo! -- a well-known brand -- comes complete with a steady stream of revenue and prodigious cash flow from advertising, making it a juicy pick for a private equity firm or a consortium of firms. The benefits to both are obvious. First on the agenda would be a new long-term plan, disregarding the short-term whims of Wall Street. With a market capitalization higher than $36 billion, it won't be cheap. The stock is already trading at a P/E of 53 times trailing earnings. I think this is already frothy, and buyout firms are very price-sensitive, so this may preclude a deal or much of a premium.

What about an acquisition? Given its market cap, very few could afford the price tag. Microsoft (Nasdaq: MSFT) has been mentioned frequently, since Mr. Softy is eager to enter the search engine space in a meaningful way, and this would seemingly accomplish the goal. However, a culture clash could get in the way. Oh, how people forget how many deals fail because of incompatible cultures. Remember the AOL/Time Warner (NYSE: TWX) deal? The aftermath included years and countless dollars of trying to make it right.

Google (Nasdaq: GOOG) has popped up recently as another possible suitor, but there would be serious anti-trust issues. Google has more than 50% of the search engine market, and Yahoo! captures another 23%. If Google's deal with DoubleClick is drawing scrutiny by the Federal Trade Commission, imagine the cries about a Google-Yahoo! combination.

Yahoo! may well decide to stay an independent public company. But should it decide to enter a marriage with someone else, I think a private equity deal is most likely. Providing, of course, it can be done at an attractive price.

Related Foolishness:

• Three Giants, One Market, No Mercy
• Fool Video: Will Microsoft Buy Yahoo?
• SmartAds or Sad Marts for Yahoo!

Yahoo! and Time Warner are Motley Fool Stock Advisor recommendations. Microsoft is a Motley Fool Inside Value pick. Try either newsletter free for 30 days with no strings attached.

Fool contributor Larry Rothman is happy to receive feedback, and promises to read it when not being wrestled by his three children. He doesn't have any positions in the companies mentioned. The Fool has a disclosure policy.