A Merrill Lynch analyst proposes a defensive play against Google
A Merrill Lynch analyst is rekindling an old Internet romance story.
Merrill analyst Justin Post brought back suggestions that Redmond software behemoth Microsoft should consider a Yahoo acquisition. He said the No. 2 search company would be a catch for either Microsoft or a large media company looking to boost its online presence.
"A Microsoft-Yahoo combination would be in a better position, in our view, to compete against Google," Mr. Post wrote in a research note Monday.
For Microsoft, a deal for Yahoo would reduce the pressure on it to increase the market share and profitability of its MSN business, the analyst noted. Microsoft’s year-to-year sales growth of 5 percent in Internet advertising was well below estimates for industry growth of 26 percent, Mr. Post noted.
"Microsoft’s AdCenter is just beginning to build its advertiser base," he wrote.
Then there’s Yahoo. Yahoo continues to slide further behind Google. From the $900-million deal Google scored with MySpace to the search king’s $1.65-billion acquisition of YouTube-Yahoo has been slow to buy relevant companies to add to its business.
The recent deals increase Google’s prospects for display ad growth and have given the Mountain View, California, search leader the throne for Internet video traffic. Deals aside, Google continues to post blockbuster earnings results on strong online ad revenue while Yahoo struggles to find growth. Yahoo has clearly entrenched itself in a distant second.
But Merrill Lynch’s analyst noted that Yahoo now has some underappreciated assets that position it for strong online ad growth. Among them, he noted, it claims the largest global user base and No. 2 positions in video streams and search queries.
Mr. Post also wrote in his report that overall online advertising revenues will double in the next five years. And he noted that Yahoo’s investment in new search advertising technology, dubbed Panama, will eventually start to bear fruit, helping it to compete against Google.
Still, Yahoo won’t come cheap. Even with Yahoo stock down nearly 40 percent from a 52-week high of $43.66, Yahoo has a market capitalization of more than $36 billion. Also, Google should continue to eat away at Yahoo’s affiliate position and should gain in ad inventories from social networking and other places.
Yahoo shares climbed $0.61, or 2.41 percent, to $25.95 in recent trading, while Microsoft shares gained $0.19 to $28.53.
WSJ.com
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