Street weighs in on Yahoo bid

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Related: Microsoft execs point to synergy

NEW YORK -- Friday's acquisition play by Microsoft Corp. for Yahoo has wide-ranging implications for the future of Time Warner's AOL unit, Google and other sector players, analysts said in first reactions Friday.

One consequence of the deal, if it happens, could be to slow down the recently rampant pace of acquisitions in the online space, which has led some to speak of a new valuation bubble.

Also, the initial Wall Street consensus is that no media and entertainment giant will feel the need to make a counter offer for Yahoo. However, some immediately suggested that Google could move to acquire AOL.

"It would be premature for us to comment at this time," a Google spokesman said, though. Analysts argue that a Yahoo sale could accelerate TW's decision on AOL's future. New TW CEO Jeff Bewkes has signaled he will evaluate potential deals to create shareholder value. One of the most-discussed possibilities is a merger, sale or spinoff of AOL.

A TW spokesman and an AOL spokeswoman declined comment Friday. "On the positive side for AOL, we believe this (Yahoo) offer underscores the strategic value of Internet assets with scale and audience size," Bear Stearns analyst Spencer Wang said in an investor note Friday morning. "With some of Yahoo's well-publicized issues, we submit that AOL (with a much smaller subscription revenue base now) is an increasingly comparable asset with a large display and third party ad network business. Therefore, strategic interest for Yahoo bodes well for AOL."

Friday's early jump in Yahoo shares also suggested to some on the Street that investors see the potential for a small increase in the takeover price.

RBC Capital Markets analysts held a conference call to discuss the Yahoo-Microsoft deal, with analyst Jordan Rohan saying it was "not a coincidence" that Terry Semel stepped down as Yahoo chairman late Thursday night as he had rebuffed Microsoft in the past. "With the Semel roadblock now gone, there's increased reason to believe this will likely happen," he said.

Will any media and entertainment giants jump in to make a rival bid for Yahoo? After all, News Corp. had last year considered combining Yahoo with its Fox Interactive Media assets. But most Wall Street observers see the likelihood as small.

"I imagine in the boardrooms of News Corp, Comcast, GE, they're discussing whether they care to get involved," Rohan said. "My guess is the discussion is very brief. ... The chance for another bidder is very low."

Plus, he added: "Microsoft could easily up their bid to the level that drives everyone out." The effect on the broader Web deal space and companies looking to sell for high price tags could be significant if the Microsoft-Yahoo deal does happen, because it eliminates one big bidder, some suggest.

"This may constrain valuation multiples just a bit in the online space," according to Rohan. "This could lead to a decreased M&A environment for larger Internet companies." Fellow RBC analyst Fred Bouchet predicts "a lengthy review" of the Yahoo-Microsoft deal by regulators, suggesting it could take about as long as the recent Google-DoubleClick transaction, which took eight months to get done.

"You can make a good argument that you're going to provide a stronger No. 2, and that should win the day" in Washington, the analyst suggested. For Google, which has been viewed as the 800-pound gorilla in the online space, the deal could mean less scrutiny from regulators in the future as it can now argue it has a strong competitor, the RBC analysts believe.

Rohan, for example, said that the merged entity's "combined development budget would rival if not exceed that of Google." Meanwhile, Ian Whittaker, European media analyst for UBS, in a first reaction focused on the impact that a Yahoo-Microsoft combination would have on the advertising industry and particularly big ad agencies.

"We do not think advertisers in particular would be keen on cutting out the "neutral" agency from the process," he said. "In any event, we do not think Microsoft buying Yahoo increases that perceived threat: Microsoft's main "enemy" and focus is Google."
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