Yahoo to Microsoft: Cheapskate

Yahoo has dusted off a three-month old financial plan to reinforce its contention that the company is worth much more than Microsoft has offered to pay for it.
The plan, presented to Yahoo's board of directors in December, predicts that Yahoo will double its operating cash flow over the next three years from US$1.9 billion to $3.7 billion, the company said Tuesday.

The plan also forecasts that, subtracting the commission that Yahoo pays to sites in its advertising network, Yahoo will generate $8.8 billion in revenue in 2010.

The plan, drafted before Microsoft announced its US$44.6 billion bid on February 1, supports the decision by Yahoo's board to reject that acquisition offer for undervaluing the company, Yahoo said.

In addition to trotting out the plan, Yahoo on Tuesday also reaffirmed its outlook for first-quarter 2008 revenue to be in the range of $1.68 billion and $1.84 billion, and between $7.2 billion and $8 billion for the full fiscal 2008 year.

The plan's forecast in general is extremely aggressive and optimistic, a best-case scenario, said financial analyst Clayton Moran from Stanford Group. "The stars have to align perfectly for them to hit those numbers," Moran said.

The revenue and cash-flow goals are way above what Wall Street expects, Moran said, adding as an example that his forecast for 2010 revenue is $7.5 billion -- $1.3 billion less than Yahoo's expectation.

Yahoo submitted a copy of today's news release and of the investor presentation to the U.S. Securities and Exchange Commission on Tuesday.

A Yahoo spokeswoman said the company wouldn't comment beyond what's stated in the news release, so it's not clear why the company didn't disclose this plan earlier.

A good time to do that may have been on Jan. 29, when the company announced its 2007 fourth-quarter results, which were generally considered disappointing as Yahoo missed revenue expectations and saw its net income fall. In addition, that day Yahoo also announced it would lay off about 1,000 employees and CEO Jerry Yang warned that the company would likely face "headwinds" this year.

The day after that report, Yahoo's shares hit a 52-week low at $18.58, before closing at $19.05. After Microsoft announced its bid on the morning of Feb. 1, Yahoo's shares jumped and closed that day at $28.38.

On Tuesday, Yahoo said that its bullish three-year plan is based on a forecast of $1.9 billion in added revenue -- minus the ad partner commissions -- over the next three years from display and video advertising, and $1.4 billion in added search revenue.

Microsoft didn't immediately reply to a request for comment.

Yahoo has been reportedly trying to strike up a deal that will allow it to reject Microsoft's offer without making itself liable to lawsuits claiming that by rejecting Microsoft, Yahoo's board didn't look out for investors' best interests. Yahoo has reportedly held talks with Google, AOL, News Corp., Disney and others.

Microsoft has indicated it's willing to pursue any options to acquire Yahoo, leaving the door open to a hostile takeover through a proxy fight. Earlier this month, Yahoo lifted the deadline for nominating directors to its board, an attempt to discourage Microsoft from launching a proxy fight to replace the current board with members willing to approve its Yahoo acquisition bid.

Moran sees Yahoo's announcement as its last public posturing to try to prod Microsoft to increase its bid before the two companies inevitably sit down to negotiate in earnest.

Clearly, Yang has come up empty-handed in his attempts to hammer out an alternative deal, and Yahoo's stock price will likely drop back to its pre-Microsoft-bid levels if the Microsoft acquisition doesn't happen, he said.

At the same time, Microsoft's offer looks better today than it did four weeks ago, due to the deteriorating macroeconomic scenario and shrinking market valuations, Moran said.

Microsoft offered to pay $31 per share for half of Yahoo's outstanding shares in cash -- about $22.3 billion -- and 0.9509 of a Microsoft share for the other half. Microsoft's half-cash/half-stock offer to Yahoo was valued at about $44.6 billion when it was made; Yahoo's share price was $19.18 at the time, while Microsoft's was $32.60.

At the time, the offer represented a 62 percent premium based on the price of Yahoo's stock, but that premium has been erased as Yahoo's stock has risen and Microsoft's fallen. In mid-day trading on Tuesday, Yahoo's stock price was $27.38 and Microsoft's $28.87.