Yahoo Outlook Highlights Value for Microsoft

Citigroup says Yahoo's financial plan is promising but notes that the company's strengths are what Microsoft covets.

Yahoo's release of its financial outlook was designed to pump up investor confidence in the company as it seeks to stave off an offer from Microsoft. But will it backfire?

Yahoo March 18 said it expects to double cash flow over the next three years to $3.7 billion and post sales of $8.8 billion in 2010. TechCrunch pores over parts of the 35-page presentation here.

Equities analysts such as Citigroup Investment Research's Mark Mahaney cheered the news, calling it a positive development in the wake of rising recessionary fears of weakness in online advertising.

He also suggested the plan, in which Yahoo hammers home the value of its brand, 477 million worldwide users, display ads and Yahoo Search, cash flow, and earnings potential, further underscores why Microsoft needs to buy the company to flip its Internet fortunes.

"We continue to view Yahoo's strategic value to Microsoft as substantial and that buying Yahoo may be Microsoft's ONLY game changing option in the Internet sector," Mahaney wrote in a research note March 18. "Although we maintain the $31 target, we continue to believe [a] Yahoo sale to Microsoft [for more than the] initial $31 bid is the most likely outcome."

Mahaney said that given Microsoft's failure to cultivate an online business of scale, contributing to $1 billion in operating losses over the last year, Microsoft is very committed to buying its rival.

The idea is to close the chasm in search and online advertising with Google, which earned more than $16 billion in online advertising in 2007 thanks to its paid links program.

Microsoft is also concerned about Google's increasingly popular Web applications business, which threatens Microsoft's traditional Office and SharePoint packages.

Mahaney said that while Yahoo's search monetization and display advertising are strong, he rates Yahoo as a hold and high risk due to the competition in online advertising and paid search from Google, Microsoft, AOL and others, declining search query market share, and downwardly revised partnership deal terms with partners such as AT&T.

Yahoo said in a statement its financial plan was presented to its board of directors in December, well before Microsoft offered to buy the company for $31 a share, or $44.6 billion, Feb. 1.

The deal, which Yahoo roundly rejected for undervaluing the company, is worth about $42 billion now as Microsoft is mulling a proxy fight.

The financial plan is a seed for investors, with whom Yahoo is meeting this week, according to the Wall Street Journal. Executives from Yahoo and Microsoft reportedly met last week in Silicon Valley to negotiate.

As part of its oft-uttered pledge to "evaluate all of its strategic alternatives to maximize value for Yahoo stockholders," Yahoo has allegedly discussed deals with Google, MySpace and AOL but hasn't come to terms with any of them.

To view the full Yahoo presentation, click here.