What Microsoft should pay for Yahoo

Financial trends and news by John Shinal
July 7, 2008 last edited July 10, 2008
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 Now that Microsoft and dissident Yahoo shareholder Carl Icahn have said they'd be interested in a deal if shareholders oust the current Yahoo board, it's worth checking out how much buying Yahoo might boost Microsoft's revenue.

The following is back of the envelope calculations on how much Yahoo might add to the Microsoft top line two years out.

The biggest and most obvious piece of Yahoo that interests Microsoft is its search business, something Microsoft CEO Steve Ballmer has repeatedly said he wants to buy.

Yahoo has about 20% of the U.S. search market, which is expected to grow to $15.6 billion by 2010, according to the latest figures from Jupiter Research.

Google has been taking share from both Yahoo and Microsoft in the U.S. search market for the last three years, a trend that's likely to continue -- or perhaps even accelerate -- given the uncertainty surrounding a potential merger.

Let's say Yahoo hangs on to 15% of the market two years out, that would boost Microsoft's revenue by $2.3 billion in 2010.

Yahoo also has a sizable chunk of the display advertising business, which comprises about a fifth of all online ad spending, expected to total $31 billion in 2010. An increasing chunk of the display ad business is going to ad networks, and Google is boosting its share of this market thanks to its acquisition of DoubleClick.

Let's say they can also maintain 20% of that market, that would be another $1.2 billion in Microsoft revenue.

Now, all this is speculative, of course. Analysts expect Yahoo's total revenue to rise to $6.5 billion all of 2009, but those estimates will have to come down because of the turmoil that's been surrounding Yahoo.

When top executives leave in droves, as has happened at Yahoo, projects get delayed and sales targets don't get met.

It's going to take some major integration work by Microsoft to stem the bleeding and convince key Yahoo employees to stay.

If Microsoft can plug some of Yahoo's content into its Xbox 360 platform and boost online ad revenue by giving advertisers an alternative to a network with the reach of the combined Google-Doubleclick platform, they may be able to boost Yahoo's expected revenue.

But I wouldn't count on it, for the reasons mentioned above, which is why I doubt that Microsoft will pony up $33 a share for Yahoo, as it previously offered.

The fact that no other bidders have surfaced for all of Yahoo, and given that Yahoo's stock now rests at around $24 a share -- after the Icahn-Microsoft releases --  Ballmer will have a clear shot at the company for around $30 a share.

If Icahn and other dissident shareholders who piled into Yahoo in the high-$20 range are satisfied to get that much after the near-disaster of the Jerry Yang negotiations, a deal could come quickly if and when Yahoo gets a new board.

To see our full coverage of the Microsoft bid for Yahoo, click here.