Business | Technology
It's time for Yahoo to call off the search
Since Microsoft's offer was announced, Yahoo has desperately cast around for alternatives. A mooted tie-up with Time Warner's AOL unit looked messy, lacking a firm headline price for Yahoo's investors.
- Financial Times
- Published: 00:11 May 6, 2008
And the winner is Google. The shadow cast by the internet search giant has formed the backdrop to Microsoft's bid to take over Yahoo all along. It now appears to have also helped to stymie a deal.
Since Microsoft's offer was announced, Yahoo has desperately cast around for alternatives. A mooted tie-up with Time Warner's AOL unit looked messy, lacking a firm headline price for Yahoo's investors. Now, if Microsoft's letter announcing the withdrawal of its offer is anything to go by, Yahoo appears to be banking on outsourcing its paid search business in some way to Google as an alternative to an outright sale. In theory, that would free Yahoo to focus on other businesses where it actually has a chance of competing successfully, while still reaping some cash flow from a search joint venture. If combined with an AOL merger, Sanford Bernstein reckons this arrangement could push Yahoo's valuation to $37 per share. Even if cleverly structured, however, such a deal would, in substance, still involve some sort of agreement between the number one and number two search providers. It is hard to imagine antitrust regulators being comfortable with that.
If a deal with Google is in the offing, Yahoo will have to move quickly. Having rejected Microsoft's sweetened proposal of $33 per share, Yahoo's stock looks set to fall sharply. Using a pre-bid multiple of 2008 earnings of 44 times, and factoring in the increase in consensus estimates since February, would imply a value of $22 per share - 23 per cent below Friday's close.
In reality, any fall would probably be much less than that. In spite of this setback, Yahoo remains in play, so the bid premium embedded in its share price will not disappear altogether. Microsoft remains the most logical buyer and can always renew its interest, particularly if talk of a Yahoo-Google agreement comes to nothing. Microsoft was right not to pursue a hostile deal. But in launching its original bid and then indicating a willingness to increase it, the company has sent a strong signal that a standalone web strategy to compete with Google is not really viable. As for Yahoo, it is hard to see the company achieving a $37 stock price any time soon under its own steam. Investors can expect another round in the saga of Microsoft and Yahoo at some point. In the meantime, the longer it can help to delay any tie-up between its competitors, the better Google will do.
Commodities ratios
Just like everybody else, commodities speculators are looking for a meaningful relationship - between the prices of different commodities that is. When a market is transformed from specialist niche to retail phenomenon - as is the case with commodities - many new investors rely on rules of thumb. The simplest involve price ratios, of which the best known centres on gold and oil. A common refrain of goldbugs is that an ounce of gold now buys less than eight barrels of oil, against a long-run average of just under 16. On that basis, gold is cheap and ought to rise as it reverts back to its "mean".
Since 1982, the gold-oil price ratio has risen as high as 33 and has fallen as low as seven. Several qualitative factors link the direction of oil and gold prices, such as a tendency on the part of investors to hoard both at times of crisis or rising inflation. But making judgments on the future through a backward-looking ratio of market-set prices is nonsensical. The current ratio is no reliable guide as to whether gold will rise or oil will fall.
The gold-oil link is very weak. Comparing daily price movements of the two over the long term yields a correlation factor of less than 0.1. The correlation of, say, gold and silver prices is much higher. But even then, the volatile ratio between the two offers no guide. The frequency with which such ratios are cited as investment tools helps in one way. Alongside the sharp rise in correlation between the daily price movements of most commodities recently, it highlights the swelling amount of cash entering the market without a fundamental basis.
If a deal with Google is in the offing, Yahoo will have to move quickly. Having rejected Microsoft's sweetened proposal of $33 per share, Yahoo's stock looks set to fall sharply.
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