Street second-guessing Yahoo

Post-Semel gains wiped out as probability of a sale diminishes

Yahoo Inc. shareholders Tuesday seemingly rethought their initial enthusiasm over the resignation of CEO Terry Semel.

Shares had risen 5% in after-hours trading Monday once the announcement was made, but that gain was wiped out Tuesday as shares finished 1.8% lower than where they traded before Semel's resignation.

Analysts said the negative reaction was partly because of the realization that Yahoo no longer can be considered a takeover target anytime soon. After all, if negotiations were under way, Semel would have stuck it out through the fruition of a deal.

Yahoo had been said to be an attractive acquisition candidate for Microsoft Corp., Comcast Corp., Time Warner Inc. or others, and it was estimated that it could fetch $40 a share or more. Yahoo closed down 49 cents on Tuesday to $27.63.

But Semel resigning and Yahoo co-founder Jerry Yang becoming CEO "implies that the near-term probability of a sale of the company is low," Goldman Sachs analyst Anthony Noto said.

Noto, citing continuing headwinds in Yahoo's effort to compete against Google Inc. and Yahoo's admission Monday that financial results in the second half of the year will be at the low end of expectations, reduced his year-end $34 price target on shares to $32.

Yang, during a conference call Monday, predicted that Yahoo will remain an independent company but that strategic partnerships are certainly welcome.

"We believe Yahoo will consider partnerships with Comcast, AT&T, AOL, News Corp./ MySpace and Microsoft," said Jordan Rohan of RBC Capital Markets. "We believe an acquisition of Facebook would also be interesting, although a more likely acquirer of Facebook may be Microsoft."

Rohan has a $34 target on Yahoo, citing the company's opportunity to monetize its audience of 500 million unique users each month.

"The strategic value of Yahoo's user base far exceeds the current share price. We continue to recommend shares," he said.

Some on Tuesday noted that Yahoo, still searching for a permanent chief technology officer after last month's sudden departure of Farzad Nazem, wanted to trade Semel for Yang because of the latter's technological prowess and his ability to attract others with such skills.

JMP Securities analyst William Morrison, however, said that "we remain concerned that closing the technical talent gap with Google would take many quarters and will represent a significant challenge for Yahoo." The analyst rates Yahoo's stock a "market perform."

Added Bear Stearns analyst Robert Peck, "A new vision for the company was needed at this juncture in its life cycle, and Jerry Yang will add a more technology-centric focus for the company."

Peck also likes that former CFO Susan Decker was promoted to president, saying her new role "consolidates power, which leads to quicker decisions."

The analyst has an "outperform" rating and $34 target on shares.

Youssef Squali of Jefferies & Co. has a bit of a contrarian view on Monday's management shake-up, arguing that it actually "increases the chances for a sale" of the company. He said potential suitors include Microsoft, Comcast, News Corp. and Viacom Inc.

Squali added that Yang and Decker "bring strong execution capabilities but not necessarily a fresh vision to Yahoo." He nevertheless calls Yahoo a "buy" because of the stock's "attractive valuation, strong brand name and unique set of assets."

Finally, not many on Wall Street found Monday's management shifts terribly surprising given that Yahoo shares have been largely stagnant for three years after their initial surge early in Semel's tenure.

"This has a ring of inevitability about it," Ovum's David Bradshaw wrote. "Something has to give in the combination of a relatively underperforming company and a CEO who is reportedly one of the highest paid in corporate America."