I Don't Hate Yahoo!

I haven't been making a lot of friends in the Yahoo! (Nasdaq: YHOO  ) camp these days.

Ever since Microsoft (Nasdaq: MSFT  ) was shot down by Yahoo! three months ago, I have suggested that Microsoft should walk away from the deal.

I even received some hate mail this week from a Yahoo! shareholder, who feels that I should pipe down. My correspondent argues that Yahoo! investors stand to lose a lot of money if enough anti-buyout stories convince Microsoft to walk away.

Imagine that: A Yahoo! shareholder who believes more in Microsoft's exit strategy than Yahoo!'s entry strategy. As if this is some big ruse, where we're supposed to tiptoe around the obvious until Microsoft CEO Steve Ballmer springs the trap. I can't let that happen.

Ballmer? Stop! Look down. You'll be walking a mile in former Hewlett-Packard (NYSE: HPQ  ) CEO Carly Fiorina's stiletto pumps if you go through with this. If pushing through a divisive purchase at a controversial price doesn't find you drawing parallels between Compaq and Yahoo!, then go right ahead and burn through Microsoft's coffers until your company kicks you out, too.

Let's give Yahoo! some credit
I have nothing against Yahoo!. I would rather eat a bowl of honey-coated gravel than to give up Google (Nasdaq: GOOG  ) for search queries, but I lean on Yahoo! heavily throughout the day for things like free email, its amazing finance portal, and the photo-friendly Flickr.

So let me do something so pro-Yahoo! that even blushing Yahooligans haven't attempted it: I'll argue that Yahoo! will eventually be worth more on its own than with Microsoft.

Let's start with outsourcing its paid-search space to Google. Yahoo! appears closer to hooking up with Google after a two-week test proved successful. Despite the negative implications this sort of surrender might raise about Yahoo!'s own paid-search product, the deal will beef up Yahoo!'s margins and monetization.

Exactly how material the move will be is always open for debate, but let's go with the anecdotal evidence of YPN vs. AdSense. As Google's paid-search program for third-party publishers, AdSense has grown nicely with every passing quarter. YPN, Yahoo!'s response, is showing year-over-year declines. In other words, publishers who have tested both AdSense and YPN as paid-search monetization have almost universally concluded that Google offers the better product. It's the Oreo to Yahoo!'s Hydrox.

What about antitrust concerns? I'm not worried. You didn't see the government keep the last Hydrox factory running, did you? Companies like AOL and MySpace have turned to AdSense. Will the government really deny Yahoo! the right to make more money through a third-party platform?

Even if Yahoo! and Google have to come up with some kind of cross-promotional arrangement, Google ads on Yahoo! pages will ultimately mean more money and lower internal overhead for Yahoo!.

More than just outsourcing
Yahoo! has been a shrewd investor in Asia. Its stakes in Alibaba, Gmarket (Nasdaq: GMKT  ) , and Yahoo! Japan were worth more than half of Yahoo!'s overall market cap before Microsoft came knocking.

Now that both Alibaba and the Chinese government have threatened to invoke ownership-transfer clauses if Microsoft acquires Yahoo!, it's clear that Yahoo!'s investments are worth more to Yahoo! than as a taxable event to someone else.

The icing on this cake is that the value of Yahoo!'s Asian investments is limited to Alibaba's IPO of its Alibaba.com B2B e-commerce site. Once investors renew their appetite for Chinese equities, Alibaba Group should be able to cash in on even more value, either by taking itself public or spinning off other appendages like Taobao, which crushed eBay (Nasdaq: EBAY  ) in consumer-to-consumer auctions in China.

On its own, Yahoo! will also be able to realize the growth of its cooler properties like Flickr, social bookmarking site del.icio.us, and Yahoo! Answers. Once it turns over the keys to Google in paid search, it will be more focused on its growth assets, and on building its presence in display advertising.

No more Mr. Softy
There's also the concern that a Microsoft so desperate to pay a lofty premium for a rival like Yahoo! may be more desperate than it has let on. "I don't want to belong to any club that will accept me as a member," to paraphrase the old Groucho Marx line.

Microsoft's latest quarter showed sobering weakness in its flagship software lines. Yahoo! investors won't be happy if they're getting half of their buyout in the form of a taxable cash distribution, and the balance in potentially unstable Microsoft stock.

So can you blame me for being far from sold on this deal? I believe that Microsoft's money would be better served going into cloud computing or video game software. I believe that Yahoo! would be flimsy putty in Microsoft's clumsy hands. They each need something, but it's not each other.

I may have urged Microsoft to walk away from this deal, but now I'm urging Yahoo! to follow suit -- and more importantly, for Yahoo! shareholders to be patient with Yahoo!'s decision to leave money on the table today in exchange for a sturdier, more profitable tomorrow.

I don't hate Yahoo!. I just hate doomed marriages.


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