Why Apple should buy Yahoo
This option has an attractive payoff, increases revenue and profit and could improve both companies' respective positions.
By Robert Weinstein
NEW YORK (TheStreet) -- Remember watching cartoons when you were a kid (or now with your kids) featuring pirates desperately searching for a safe place to hide their treasure chests overflowing with gold coins?
Apple (AAPL) shares a pirate's dilemma of trying to establish the right location to place its bounty. With the company's cash flow, revenue, income and margins strong and largely growing, investors can expect the problem of what to do with all its cash is not about to go away soon. Of all the problems a company may have, I can't think of a better one. Regardless, it's still a problem.
What should Apple do with the overflowing war chest it's building? It's a question on everyone's mind, from Carl Icahn to the smallest odd-lot investor. Icahn's investment may have grown to over a billion dollars in the iPhone maker. He wants increases in dividends and stock repurchases, and he is known to have significant corporate influence.
A billion dollars gets you a meeting with Tim Cook, but don't expect to impress him. With only a billion dollars, you won't find your name among the guest list for the top 20 largest investors. Anyway, Apple is already buying back shares and has recently increased its dividend. I expect more to come, but Apple can use its war chest to grow and add shareholder value.
Microsoft (MSFT) CEO Steve Ballmer recognized Yahoo's potential value and offered $31 a share in 2008. After the takeover failed and Yahoo shares plummeted during the financial crisis, Ballmer said, "Sometimes you get lucky." (Microsoft owns and publishes MSN Money.)
I think Ballmer correctly understood Yahoo's unrealized potential, and was also right that Microsoft dodged a bullet when the deal fell apart at the cusp of imploding valuations. That was so 2008, and now Alibaba's valuation is estimated at a minimum of $50 billion, with a strong justification to place it near $100 billion. Yahoo owns about 24%, meaning if you use a back-of-the-envelope adjustment, over 60% of Yahoo's current market valuation is in cash and investments.
Yahoo is already trading at a price-to-earnings ratio of less than 10. After stripping out cash and investments, and adjusting the P/E with a wide margin for error, it's a no-brainer for many to buy. For Apple, the case becomes even more compelling because it allows the iPhone maker to grow revenue relatively cheap and helps position Apple into new, but related areas that compliment Apple's competitive position.
Google (GOOG) is arguably Apple's biggest competitor, even if indirectly as a result of the Android mobile platform. It used to be BlackBerry (BBRY), but the iconic Canadian wireless provider is about one severe snowstorm away from disappearing altogether.
Google depends on vast amounts of traffic to generate equally impressive ad revenue. According to comScore's July report, Yahoo is No. 1 in unique visitors, followed closely by Google, and Apple comes in at No. 11.
Beyond anything else, we know Apple is brilliant at monetizing everything it touches, something Yahoo and Microsoft can't currently claim. Google's gift to provide relevant search results is only half of its success story. The other half of its success is so simple that it makes my head hurt when I contemplate why Yahoo and Microsoft's Bing never implemented it.
The other half is how easy it is to buy ads in the Google network. Small businesses, the ones that are willing to pay the most for any given unit of ads, are all but unwelcomed by others, except for Google. An Apple-controlled Yahoo would likely create a world-class search experience.
Yahoo email, games, finance, and other segments may allow Apple to bring massive amounts of new people into the iSystem from around the world. If executed correctly, users will have less reason to migrate to Android and Apple can use the Web traffic from iDevices to increase the per-user revenue generated that is currently lost.
Of course, a merger the size of Apple and Yahoo will have its speed bumps, albeit this is an option that has an attractive ROI payoff, increases revenue and profit and could improve both their respective positions against Google and Microsoft.
At the time of publication the author had no position in any of the stocks mentioned.
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