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Unweaving a Tangled Web

Cramer is proposing something radical, even by Cramerica standards: Yahoo! and eBay should merge. These are two quickly declining companies that could come together and form something worth owning, because Cramer wouldn’t recommend either stock on its own right now.



Yahoo and eBay have everything to gain by merging, Cramer says. Neither company is growing – and growth is everything on Wall Street. It wouldn’t be the first time two industry giants came together when growth was slowing. Procter & Gamble did it with Gillette. Exxon merged with Mobil, Chevron with Texaco, Kmart with Sears. These companies all had hit wills, Cramer says, and they realized they had to come together if they wanted to get their growth back. This is the situation facing Yahoo and eBay.

The Internet is one area that continues to slow, Cramer says, mostly because of competition and saturation. But the web isn’t slowing for everyone. Google’s growth is accelerating, along with its earnings, which is another reason why Yahoo and eBay should come together: to finally produce an alternative to Google. Microsoft’s $6 billion price tag for aQuantive – after the company had never paid more than $1 billion on an acquisition – reeks of Internet desperation. It’s time someone else came up to the plate, and a Yahoo-eBay combination could be the answer.



YHOO and EBAY are slowing so quickly that just yesterday Merill Lynch downgraded them. There are no catalysts, growth is decelerating and earnings estimates are at risk for both companies. They’re tired. Cramer just doesn’t see much room for either one to go up the way things are. But they also probably won’t plummet because both stocks are being propped up with massive buybacks. Desperate shareholders love buybacks because they act as crutches for the stock, allowing the shareholders to get out while they still can. But what investors really want is growth, and growth companies don’t issue huge buybacks because they use their cash to expand, Cramer says.

Yahoo and eBay both have roughly the same market-cap and core, seemingly-unassailable franchises – search and auction, respectively. Yahoo has the users, eBay has Skype. Yahoo has the advertisers, eBay needs the advertisers. And given the lean nature of Internet companies, Cramer thinks Yahoo’s ad salesforce could replace all of eBay’s and eBay could focus on monetizing Skype. The synergies would be unquestionably gigantic, he says.

Cramer doesn’t see why these companies should let their stocks continue to go lower. A merger could raise the numbers, use its combined cash flow to grow instead of just propping up the stock, and, perhaps most importantly, we could pronounce a new Internet colossus that could really take on Google.

Jim's charitable trust owns Yahoo and Sears Holdings.

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