Yahoo! Doesn't Get the Joke

Sorry, Yahoo! (Nasdaq: YHOO  ) . Park's closed. The sign out front should have told you. 

I don't know who Yahoo! thinks it's trying to kid here. As Anders Bylund pointed out earlier today, the company is delaying its board nominations as a way to buy time to sort through the available alternatives to Microsoft's (Nasdaq: MSFT  ) buyout proposal.

Several media outlets are reporting that Yahoo! is striking up combination talks with Time Warner's (NYSE: TWX  ) AOL and News Corp.'s (NYSE: NWS  ) MySpace.

What market watchers fail to point out is that any kind of combination is likely to end up with a lower share price for Yahoo!.

Investors need to know that the only thing keeping Yahoo!'s stock closer to $31 -- rather than in the high teens -- is Microsoft's buyout offer. Once that's off the table, there's little reason for the market to value Yahoo! at more than 50 times next year's earnings, especially when faster-growing search rivals like Google (Nasdaq: GOOG  ) and Ask.com parent IAC (Nasdaq: IACI  ) are trading at an earnings multiple in the teens based on next year's profit targets.

AOL and MySpace are smaller entities than Yahoo!, so it's not as if they would be paying a premium. They are, no doubt, hoping to turn to Yahoo! as a meal ticket to see if they can get their assets dusted under the rug at the same outlandish multiples as Yahoo! is artificially trading at right now.

It's like the worst Three's Company episode you ever saw, minus the laugh track. Yahoo! thinks it's a trophy wife, while AOL and MySpace see it as a sugar daddy.

The Regal Beagle has fleas
It's hard not to laugh. AOL, MySpace, and Yahoo! are all having drinks under the impression that someone else is going to pay the tab. It's going to be a festive killjoy when it's time to clear the account.

But wait! We can't forget the Google wildcard. What if Google is coming into play here?

Duh. Of course Google has a say here. It's the company that provides the paid search ads for both AOL and MySpace. It's also the only other company besides Microsoft with the potential synergies in place to pay Microsoft money for Yahoo!.

The problem is that regulators would never allow the two largest search engines to hook up. If the $3.1 billion deal for display advertising heavy DoubleClick is being held up in the digestive tracts, Google isn't going to even have a shot at unhinging its jaws for a $45 billion swallow of Yahoo!.

It can't happen.

The only feasible solution is for Yahoo! to outsource its online advertising to Google. Doing so would improve Yahoo!'s margins at the expense of its morale (given the boatload of Yahooligans who would be canned). And if I'm wrong about the layoffs, then I would also be wrong about the margins.

The problem -- nay, the punch line -- is that Yahoo! may be running to an ad outsourcing deal with Google, just as Google partners AOL and MySpace are running to Yahoo! for sanctuary. They're running away from one baddie to the other's baddie, and Mr. Roper is here to collect this month's rent.

More trip err than Tripper
Google already called out MySpace as a poor monetizing site. It blamed its social networking partners for sloppy online ad performance during its most recent quarterly report. Google AdWords is a great program for paid search and delivering targeted ads to sites that sway consumer buying decisions, but it's apparently lousy on sites where teens go to display gaudy templates, swap embarrassing snapshots, and take on gobs of fake virtual friends.

This should be troublesome for Yahoo! if it thinks that outsourcing its ad space to Google will be a dreamy lifeboat. AOL, Yahoo!, and MySpace all draw heavy Web traffic, but do so mostly from freeloaders looking to collect email, exchange IMs, and catch up on gossip news.

AOL and Yahoo! websites are likely more marketable than MySpace's penniless ego-stroking ways, but it will never be the kind of gravy that Google is able to skim at its search engine stronghold, where visitors go because they need direction about where to go next.

So play out all of the scenarios in your head. News Corp. would want a premium out of Yahoo! for handing over MySpace. Time Warner would want the same thing out of AOL. All that Yahoo! would get out of it is even more poorly monetized page views, something that it already has in abundance on its own.

All of the slapstick will frighten away a stoic-faced Microsoft, but what will Yahoo! be left with when the trophy wives see themselves in the mirror for the eyesores they really are? After the sugar daddies rifle through their empty pockets to realize how much they're really worth?

There's a knock at the door. It's Mr. Roper again.

For another Foolish episode:


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