The Merger Yahoo! Needs

I'm not one for conspiracy theories but I do believe that everything happens for a reason. Why am I telling you this? Context. I want you to understand that when I say Facebook and Yahoo! (Nasdaq: YHOO  ) should combine, it's not out of some headline-grabbing flight of fancy. It's because I believe events are conspiring to make such a deal a winner.

Ripped from the headlines ... chung, CHUNG!
First, the weekend edition of The Wall Street Journal reported that Facebook had raised $1 billion in funding from overseas investors. Goldman Sachs (NYSE: GS  ) , which has already bet $450 million on the company, organized the round.

Then, just ahead of yesterday's fourth-quarter report from Yahoo!, the Journal's AllThingsDigital blog reported yet another layoff. The company is cutting another one percent of its staff. The reasoning? Um, you figure it out:

"The personnel changes we are making are part of our ongoing strategy to best position Yahoo! for revenue growth and margin expansion and to support our strategy to deliver differentiated products and experiences to the marketplace. We'll continue to hire on a global basis to support our key priorities."

Ah, memories
That's what an unnamed rep told the Journal in response to its story. It's the sort of generic, "of course we're doing what's best for shareholders" pablum I wrote all the time as a member of the PR fraternity years ago. (Want an old school peek inside the party house? Click here.)

You know what else it sounds like? Desperation. The sort of we-don't-yet-know-what-we're-doing overreaching that angers employees and depresses investors. Everybody save for rival Google (Nasdaq: GOOG  ) and Facebook, which should be prepping a bid. Here are 3 reasons why FaceHoo makes sense.

1. They each live in the display window
Both Facebook and Yahoo! specialize in a market in which their chief competitor struggles. I'm talking about display ads. Facebook uses personal information to put up various displays on the right side of every profile page. Yahoo! has a vast network for placing display ads across the web.

Facebook was on track to earn 9.4% of last year's display ad market, researcher EMarketer reports, a healthy gain over 2009's 6.6%. Yahoo! led the category with 16.5% while Google claimed 6.5%. FaceHoo would put The Big G on the defensive for once.

2. Facebook's winning, but Yahoo! will fight to the end
Yahoo! CEO Carol Bartz last month said that Facebook was her company's biggest competition. She's right. Whereas Google draws in users and then redirects them, Facebook attracts digital loiterers. The average online user spends 59% more time on Facebook than Yahoo!, ComScore reported at the end of last year.

We've known this was coming. Social media is sticky. It's why Twitter is reportedly already worth (at least) $1 billion. It's also why salesforce.com (NYSE: CRM  ) created Chatter and Apple (Nasdaq: AAPL  ) Ping. For each, social media offers a means to enhance engagement, and in the process, revenue. Bartz knows Yahoo! should own this piece of the market. She'll fight to the end trying to get it.

3. Focus on a common enemy instead
It doesn't have to be that way. Why go on beating each other up, sure, when Facebook and Yahoo! share a common partner in Microsoft (Nasdaq: MSFT  ) and a common enemy in Google?

A combined FaceHoo would have one search engine (i.e., Bing), one social network (i.e., Facebook), and one communications platform (i.e., Yahoo! Mail and Messenger). It might also become a home-away-from-home for Windows Live documents and data, since Mr. Softy would surely support a combined strike at The Big G.

Yeah, but how will this work?
Facebook, for its part, already has access to a great deal of capital. According to the Journal's reporting, U.S. investors were shut out of this latest round of financing because opening it up would have created hurdles with the Securities and Exchange Commission (SEC). But even without U.S. money Facebook's round was oversubscribed.

One source told the Journal that the social superstar could have raised at least $5 billion. And remember FaceHoo's joint partner, Microsoft. Mr. Softy alone could pitch in enough moola to complete a deal in exchange for a healthy stake in the combined entity.

Finally, the timing's right. Not only is Yahoo! bleeding but Google is transitioning, booting Eric Schmidt upstairs in favor of co-founder Larry Page as chief executive. When's a better time to put Page to the test? When he's new in the job? Or after he's already faced and beaten a few minor crises? You know the answer.

It's now or never for FaceHoo. All that remains is for Mark Zuckerberg to give Bartz a call and get this deal done. Thing I'm wrong? Have a different take? Use the comments box below to let us know what you think. You can also rate Yahoo! in Motley Fool CAPS.

What will be this year's top stock? We've got a good idea. The Motley Fool has created a brand new free report called The Motley Fool's Top Stock for 2011. In it, we reveal the little company set to profit from the broadband Internet expansion. Get instant access by clicking here -- it's free.

Interested in more info on the stocks mentioned in this story? Add Yahoo!, Google, Microsoft, Goldman Sachs, Apple, or salesforce.com to your watchlist.

Google and Microsoft are Motley Fool Inside Value picks. Google and salesforce.com are Motley Fool Rule Breakers recommendations. Apple is a Motley Fool Stock Advisor selection. Yahoo! is a Motley Fool Global Gains recommendation. Motley Fool Options has recommended subscribers purchase a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He owned shares of Apple and Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool owns shares of Google, Microsoft, and Apple, in which it has also written puts. The Fool is also on Twitter as
@TheMotleyFool. The Fool's disclosure policy drops back to pass and ... here comes the blitz! ... it moves left, avoids the rush, and there's a long pass downfield aaaannnnnddddd ... caught at the 10! The 5! TOUCHDOWN! Fools win! Fools win! Fools win!


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  • Report this Comment On January 28, 2011, at 1:04 PM, notslimorshady wrote:

    Listen, everything that Yahoo! has done over the last 15 years, Facebook is now trying to do and in the most un-secure way possible. Mark thinks he is the first person in the world to think of the things he wants to do with Facebook and doesn't listen to anyone who tries to tell him differently. So yeah, this 'merger' is probably the best thing that could happen to Yahoo! because for some reason, everyone has forgotten that Yahoo! paved the way for these other powerhouses. Jerry and Dave let Terry Semel run the Yahoo! name and company into the ground by talking a big talk and doing nothing accept bleeding out Yhoo!'s cash into his own pocket. Facebook practically hired everyone on their sales force from Yahoo! anyway, so this would actually be a great fit for them to go back to selling Yahoo! plus Facebook. How much longer can you sell ads on Facebook when no one is clicking on them or being engaged? It's just a matter of time before advertisers realize those ads are no different than the billboards people drive by on their way to work. And 'Fan' pages on Facebook are not much different than cool websites advertisers can create themselves with much more fuctionality. When will the next hacker break into the Pepsi page on Facebook and switch the logos to Coke? Didn't Mark just get his own private Facebook account hacked for cryin' out loud?!

  • Report this Comment On January 28, 2011, at 2:05 PM, notslimorshady wrote:

    Listen, everything that Yahoo! has done over the last 15 years, Facebook is now trying to do and in the most un-secure way possible. Mark thinks he is the first person in the world to think of the things he wants to do with Facebook and doesn't listen to anyone who tries to tell him differently. So yeah, this 'merger' is probably the best thing that could happen to Yahoo! because for some reason, everyone has forgotten that Yahoo! paved the way for these other powerhouses. Jerry and Dave let Terry Semel run the Yahoo! name and company into the ground by talking a big talk and doing nothing accept bleeding out Yahoo!'s cash into his own pocket. Facebook practically hired everyone on their sales force from Yahoo! anyway, so this would actually be a great fit for them to go back to selling Yahoo! plus Facebook. How much longer can you sell ads on Facebook when no one is clicking on them or being engaged? It's just a matter of time before advertisers realize those ads are no different than the billboards people drive by on their way to work. And 'Fan' pages on Facebook are not much different than cool websites advertisers can create themselves with much more fuctionality. When will the next hacker break into the Pepsi page on Facebook and switch the logos to Coke? Didn't Mark just get his own private Facebook account hacked for cryin' out loud?!

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