Microsoft Can Build a Better Yahoo!

My name is Dr. Frankenstock -- from Wallstreetvania -- and I have a serving suggestion for that mad scientist named Microsoft (Nasdaq: MSFT  ) .

Instead of trying to buy a cadaver like Yahoo! (Nasdaq: YHOO  ) , why don't you just collect living organisms without breaking the bank?

No, I'm not suggesting something horrific. My weapon of choice is Cupid's arrow, not a surgeon's scalpel. It's just that if Microsoft feels that it could spend nearly $45 billion on acquiring a stagnant company, it would serve its shareholders -- and itself -- a whole lot better by spending far less on assembling a collection of more promising online companies.

I'll provide the diagram so you can see that all of the pieces fit.

Bankrate (Nasdaq: RATE  )
There are several reasons why Bankrate would be an attractive appendage. As a standalone company, Bankrate is growing quickly at an attractive valuation. The company is set to grow its earnings by better than 40% this year, yet it's trading at just a little more than 22 times this year's profit estimate.

More importantly, Bankrate solves a problem that Microsoft will only compound if it hooks up with Yahoo!. See, Microsoft and Yahoo! serve up a ton of pages. The reason why Yahoo! and Microsoft would combine to deliver more than twice the page views of Google (Nasdaq: GOOG  ) , but just half of the ad revenue, is because they specialize in the crummy stuff like free e-mail, news, and photo-sharing -- sectors that have been historically tough to monetize.

The key to driving home Google-sized profits is to offer destinations that steer users to generate leads for high-paying advertisers. That is Bankrate in a nutshell. Even in these financially weary times, banks, brokers, and lenders want to stand out to potential customers scouring the Web for mortgage rates and CD yields. Bankrate is not only a magnetic site where institutions pay for something as simple as a hyperlink to their own financial-services websites. Bankrate syndicates its content aggressively, creating brand equity and even more leads.

The Knot (Nasdaq: KNOT  )
This is the same big-ticket advertising angle as Bankrate, only this time it's wedding planning we're talking about. The Knot attracts more than 3 million unique monthly visitors to its site, many of them nervous brides-to-be willing to spend a ton of money to make sure their wedding days are magical.

The Knot is expanding into related areas, like dedicated sites for newlywed couples and expectant mothers. Like Bankrate, it's also trading at an attractive earnings multiple given the recent dot-com downswing. Shares are currently trading at around 29 times this year's and approximately 20 times next year's Wall Street earnings estimates.

LinkedIn
Social networking has been a dog. Google pitted part of the blame for its most recent bum quarter on the difficulty of monetizing social networking. It's no surprise that the MySpace hellions don't click on ads or follow through on any potential leads: They have empty pockets. Facebook offers a slightly more attractive demographic group given its college-campus roots, but it's no LinkedIn.

With 20 million users, LinkedIn is much smaller than MySpace and Facebook. According to Alexa's ratings, even sites like Friendster, Hi5, and Google's Orkut are healthier draws on a global basis. However, LinkedIn's 20 million users are typically white-collar pros, looking to network for job leads and workforce referrals. In other words, it's the one social network that could generate attractive sums of online ad revenue if positioned tastefully.

Baidu.com (Nasdaq: BIDU  )
Who is trouncing Google in the world's most populous nation? That's Baidu, my friend. And since it's now trading at roughly 43 times next year's earnings estimates, it's a fast-growing company trading at a multiple even lower than what Microsoft is proposing to pay for Yahoo!.

Baidu would provide Microsoft with high-margin profits in a country that appears to be immune to the stateside economic downswing. And it bears pointing out that Microsoft and Baidu are buddies, since Microsoft turned over the online advertising on its MSN China site to Baidu.

Sure, the Chinese government may not approve of Microsoft swallowing Baidu whole, but it's unlikely to object to Mr. Softy grabbing a sizable stake, just as Yahoo! was able to take a 40% stake in the similarly gargantuan Alibaba.

Marchex (Nasdaq: MCHX  )
As a virtual real estate baron, Marchex owns roughly 200,000 domain names, including ZIP-code domains blanketing most of the country. With local search advertising expected to grow threefold between now and 2012, Marchex is well-positioned if it finds the right partner with a healthy inventory of localized ads.

Microsoft may not fit the bill the same way as Yahoo! or Google on that front, but it's why Microsoft needs to get to Marchex before they do.

Check, please
Marchex, Bankrate, and The Knot combine for an enterprise value of roughly $1.5 billion. Tack on a respectable buyout premium and you're still talking less than $3 billion for dynamic pieces that will help Microsoft make the most of what is now its money-losing online arm.

LinkedIn is privately held, but it obviously wouldn't bust Microsoft's bank, even if it has to shell out the $1 billion price tag that was being reported late last year before dot-com stocks started to tank in value. Taking a minority stake in Baidu wouldn't require much of a premium, so let's say roughly $5 billion in new money for a third of the company.

In other words, instead of spending nearly $45 billion in greenbacks and dilution -- including all of the company's approximately $19 billion in cash and short-term investments -- Microsoft can spend less than half of its greenery without having to print out new shares to seal all five deals.

I'm just scratching the surface, of course. It's just the way that Microsoft should be approaching the market right now. What's the point of thinking with Abby Normal's brain as it chases an overpriced fellow cadaver?

 


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