Is Google (Nasdaq: GOOG) Plotting a Yahoo (Nasdaq: YHOO) Takeover?

Yahoo! Inc.'s (Nasdaq: YHOO) never-ending troubles may renew Google Inc.'s (Nasdaq: GOOG) appetite for the once-mighty Internet giant.

After all, it wouldn't be the first time Google considered the deal.

In October, Google talked to at least two private-equity firms about helping them finance a deal to buy Yahoo Inc.'s core business, a person familiar with the matter told The Wall Street Journal.

But the latest bout of attrition at the senior management level and a flurry of strategic blunders may rekindle Google's desire to acquire the struggling firm.

Why Buy Yahoo?

Even so, many investors are questioning why anyone would want to buy Yahoo.

Indeed, Yahoo has been shooting itself in the foot for quite a few years and seems to lack a clearly defined strategy to get back on track.

As the Internet ad market continues to grow by more than 20% annually, Yahoo has been unable to increase revenues as it continues to suffer market-share losses to Facebook Inc., and Google.

Its share price has also remained stubbornly stagnant, hovering in the mid-teens for nearly three years.

To make matters worse, the company rejected a $44 billion purchase offer from Microsoft Corp. (Nasdaq: MSFT) in January 2008 that valued it at $31 per share.

Somehow, Yahoo was convinced it was worth more. Not long after, the financial crisis hit and Microsoft pulled out.

In addition, recent chaos in the boardroom is sending mixed signals to investors.

In January, Yahoo's board surprised analysts by appointing Scott Thompson, the President of Ebay Inc.'s (Nasdaq: EBAY) PayPal unit, to be the company's fourth CEO in five years.

Two weeks later, Jerry Yang, Yahoo's founder, sprang another surprise by resigning, adding fuel to speculation about a major restructuring.

Now, a key shareholder, Third Point LLC, plans to nominate its own slate of directors to the board, contending the recent overhaul wasn't enough to resolve doubts about Yahoo's future.

"The recently announced changes do not put the issuer on the right track towards maximizing shareholder value," Third Point, a New York-based hedge fund, said in a filing obtained by Bloomberg News.

A Good Fit For Google

That said, Yahoo may be struggling, but it is still a force to be reckoned with.

Between e-mail, finance, and news, Yahoo has established a valuable brand that comes with the power of hundreds of millions of daily visitors.

The Internet site gets over 178 million unique visitors monthly and has 700 million users worldwide. Its e-mail service is used by 70 million people around the planet.

Plus, it has $2 billion in cash, no debt, and it generates another $1.3 billion a year in cash flow.

While Google has long been the No. 1 player in Web search, adding Yahoo to its stable would catapult it over its rivals in the display-ad market.

Yahoo will bring in $1.6 billion in net revenue from display ads this year, behind Facebook's more than $2 billion. Google is expected to generate $1.1 billion according to The Journal.

Google would also like to expand its affiliations with Yahoo's premium content partners like ABC News, which feed video and other material to Yahoo sites that sell ads, people familiar with the matter told The Journal.

A deal could also expand Google+, the company's social-networking service to millions of Yahoo users.

A Google/Yahoo Stumbling Block?

More recently, Yahoo has been exploring a possible sale of its holdings in Asia.

The company owns a 40% stake in Alibaba Group, China's No. 1 auction site, as well as 35% of Yahoo Japan, Japan's biggest Internet site. Altogether, the Asian assets could yield roughly $19 billion.

The deal would allow Yahoo to focus on its core assets and perhaps attract more potential suitors.

But last week's talks reportedly broke down over the valuation of Alibaba's assets.

Trading in Alibaba's shares was suspended at the Hong Kong Stock Exchange earlier this month, adding to speculation about the terms of a deal.

A failure to reach an agreement would not go down well with shareholders, who are still stinging from the Microsoft debacle.

"Quite a few Yahoo shareholders are attracted by the fact that there is going to be a deal for the Asian assets," Duncan Clark, chairman of BDA, a Beijing-based investment firm told BBC News.

If the deal stalls, share prices could deteriorate further, setting the stage for Google to swoop in with an even cheaper bid.

If the deal goes through, however, Yahoo would probably be worth around $25 billion, meaning only someone with very deep pockets could pull it off.

In that case, a bidding war could erupt between Google, Microsoft, Facebook or perhaps even Apple Inc. (Nasdaq: AAPL).

News & Related Story Links:

• Money Morning:
  Android@Home, Project X, and Other Secrets of Google Inc. (Nasdaq: GOOG)
• Wall Street Journal:
  Google, Private-Equity Firms Mull Bid For Yahoo
• CNET News:
  Microsoft went public Friday with a $44.6 billion cash-and-stock bid to acquire Yahoo.
• Bloomberg:
  Yahoo-Alibaba Talks Falter as Third Point Steps Up Pressure
• BBC News:
  Alibaba and Yahoo deal 'delayed by price disagreement'
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