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Investors Hoping to See Big Changes at Yahoo

Reuters
Friday, 12 Oct 2007 | 2:52 PM ET

As Yahoo approaches the end of a 100-day strategic review, financial analysts want drastic action or even a sale of the company, although many are bracing for business as usual.

Chief Executive Jerry Yang raised hopes that major change might be in store, telling investors shortly after he took the helm of the Internet media company in July that nothing was a "sacred cow."

Since then, Yahoo has embarked on a series of modest acquisitions to enhance key businesses such as advertising and collaboration software, while shuttering marginal services and further reorganizing management of its central ad sales force.

But nothing so far resembles the radical surgery many financial analysts argue is indispensable.

Some critics say Yahoo should exit the Web search business and partner with market leader Google.

Barring that, they say Yahoo should sell itself to a deep-pocketed partner such as eBay , Microsoft, News Corp. or AT&T to create a new Internet behemoth to compete with far faster growing Google.

"There is only one type of Yahoo shareholder right now: One willing to overlook short-term performance with the belief that Yahoo is worth more to an acquirer," RBC Capital Markets analyst Jordan Rohan said in a telephone interview.

So when Yahoo reports third-quarter results next Tuesday, investors are likely to look past the numbers to see if Yang has made any hard decisions during the last 100 days.

This partly reflects the easy bar analysts believe Yahoo set for results this quarter, amid ongoing Web search market share losses to Google. But there is also concern the crown jewel of its ad business - banner display sales to brand advertisers - has deteriorated recently and faces further challenges ahead.

"We can't see in any of the outside metrics where Yahoo is making any headway in turning around its core businesses," Bernstein analyst Jeffrey Lindsay said in a phone interview.

Analysts expect Yahoo revenue to grow 10 percent to $1.24 billion from a year ago, while earnings are expected to slide around 28 percent to 8 cents a share, on average, according to Reuters Estimates.

Google is expected to report Thursday it grew five times faster than Yahoo in that period.

Keeping Expectations Low

"This is the lowest bar that a major Internet company has ever set given all the positive news coming from elsewhere in the sector," Rohan said, referring to Yahoo.

Goldman Sachs analyst Anthony Noto advises investors to stay out.

"We believe that the stock may still be a value trap given that there is meaningful risk to our current 2008 estimates and beyond given the ongoing strategic review and the dynamic industry trends," Noto wrote to investors Thursday.

Bernstein's Lindsay says that, in the battle with Google's automation of Web search advertising, Yahoo's focus on brand advertising sold by humans cannot keep pace in either expenses or margins with Google's largely computerized system.

His solution: Further automation of Yahoo's ad sales and to reduce the company's total head count by a sharp 25 percent.

"In the Internet's first decade, ads were sold as they have always been, by sales force over a round of golf," Lindsay wrote earlier this week. "Google changed all that with ... self-service."

Lindsay fears Yahoo is losing valuable time in the market by not making tough decisions to outsource search to Google, cut jobs and move more quickly to automate brand ad sales.

He calculates Yahoo is worth $39 per share if it was broken up and sold in parts, well above its combined value now of $25.

If it took the more radical steps he has proposed, the break-up value could shoot up to $45, Lindsay believes.

"We think an incremental strategy is not only risky, but virtually guarantees that Yahoo will remain mired in mediocrity - where the best hope is a take-out by a deep-pocketed partner," Lindsay said.

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