Things have gone pretty quiet on the Microsoft acquiring Yahoo front. With this break in the action we thought that it was worth putting some numbers around four potential futures of Yahoo:
1. Our take of Yahoo as a standalone entity.
2. Microsoft acquiring Yahoo at US$33 a share.
3. Yahoo completing a search deal with Google.
4. Yahoo’s growth decelerates more quickly than currently anticipated.
We have used the Valuecruncher interactive tool for analysing the various scenarios. That means that anyone can follow the below links and play with our valuations – if you want to use different assumptions.
Our assumptions are revenues of US$5.75 billion in 2008 growing to US$7.25 billion in 2010. We have used a flat EBITDA margin of 35%. We have used a terminal growth rate of 5.75%. We calculated that using a present value calculation with the growth rate dropping from 12% in 2011 to 3.5% in 2015. We used a terminal capital expenditure number of US$600 billion. We have used a WACC (discount rate) of 10.5%.
This gives a valuation of US$20.07 – 26% below the current share price of US$27.00.
Microsoft Acquires Yahoo
We have not done a separate valuation of this option. The fact that Microsoft was prepared to pay in the US$33 range means that they have done their own merger analysis of the synergies that a combined Microsoft/Yahoo can generate. We will use US$33 a share as the valuation of this potential future of Yahoo.
Yahoo Completes Search Deal With Google
We agree with Henry Blodget – a deal with Google on search is not US$1 billion of free cash flow to Yahoo. It is more likely to be in the hundreds of millions of dollars range. For simplicity we have assumed that a search deal with Yahoo adds US$1 billion to the top-line revenues. We have kept all our other assumptions from the Yahoo standalone scenario intact.
This gives a valuation of US$23.44 – 13% below the current share price of US$27.00.
Yahoo Growth Decelerates More Quickly
Keeping the assumptions from the Yahoo standalone scenario intact but dropping the growth from 12% (in the Yahoo standalone scenario) in 2011 to 10% and falling to 3% in 2015 (using the same present value calculation) gives a terminal growth of 5%.
This gives a valuation of US$17.91 – 34% below the current share price of US$27.00.
Based on our analysis it seems very straight forward. Yahoo should have accepted the Microsoft offer. Play with our assumptions – what does your analysis say?