March 18, 2008: 1:34 PM EDT
Email | Print    Type Size  -  +

Yahoo to Microsoft: Make a better offer

The Internet giant releases an optimistic forecast that values the company at a price much higher than Microsoft has offered.

By Scott Moritz, writer

NEW YORK (Fortune) -- Yahoo is sending an audacious message to Microsoft: Show me more money.

The Internet giant, looking to fend off a takeover bid by Microsoft, made public on Tuesday a three-year financial plan that, according to at least one observer, values the company at $40 a share, or 40 percent higher than Microsoft's offer.

Among the highlights of Yahoo's 35-page presentation to investors: The company said it is on target to meet its previous forecasts for the first quarter ending March 31 and the full year, and predicted sky-high growth in display advertising. The real headline grabber? Yahoo (YHOO, Fortune 500) estimated that adjusted cash flow will surge 47% a year for the next two years.

All very compelling, of course - and as you would expect from a company looking to maybe shine up its appearances in a buyer's market. Looking to elicit a higher takeover offer, Yahoo has reportedly held deal talks with AOL, a Time Warner (TWX, Fortune 500) unit and Fortune affiliate, News Corp's (NWS, Fortune 500) digital media venture that includes MySpace, and even archrival Google (GOOG, Fortune 500). Tuesday's filing is the first signal from Yahoo that its strategy has shifted from fighting Microsoft to trying to broker a better deal.

But Yahoo's crystal ball-gazing may be a tad optimistic given the slowing economy and expectations that a recession, if one comes, will lead to a slowdown in advertising, both online and offline.

The real nugget of Yahoo's pitch comes on page 27, where it sums up the advantages that it would bring to Microsoft. Yahoo argues that it would turn Microsoft from an also-ran in the Internet advertising game into a formidable player, not just in the United States and Europe but also in China. It also points, without elaborating, to so-called synergies upwards of $1 billion that the combined company would create.

Yahoo also draws comparisons to other Internet deals. The going rate for Web real estate transactions, it argues, is usually on the order of 35 times projected operating earnings, says Yahoo.

Problem is, it's hard to know what deals Yahoo is using for comparisons. It's obvious, however, that the number includes purchases of outfits with higher growth rates or greater market share than Yahoo can claim for its business. Some analysts say the typical rate for an Internet company is 20 to 25 times projected operating earnings.

"Yahoo's assertion," scoffs Henry Blodget on his blog Silicon Alley Insider is "that it's worth at least $40 a share."

With the growing uncertainty in the financial sector and a looming economic slowdown, Yahoo, with its stock at $27.58 Tuesday, will probably need more than a 35-page presentation to extract a $40 bid out of Microsoft.  To top of page