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News Corp. Could See a Fit With Yahoo

6/22/2007 8:00 PM Eastern

The abrupt departure of CEO Terry Semel last week could put Yahoo in play, with at least one media giant — News Corp. — testing the waters of possibly taking a large equity stake in the Internet giant.

According to reports in The Times of London last week, News Corp. had been in early discussions with Yahoo about possibly joining its MySpace social-networking Web site with the Internet behemoth, in return for a 25% interest in Yahoo.

HUGE PREMIUM

Yahoo has a market capitalization of about $37 billion, based on its $27.63-per-share stock price on June 19 and 1.34 billion outstanding shares. That would mean the deal would value MySpace at about $12 billion. News Corp. bought MySpace in 2005 for about $580 million.

The Times noted the talks were in their infancy and the management shakeup — Semel is now non-executive chairman — put any discussions on hold.

On a conference call with analysts June 19, Yahoo co-founder Jerry Yang, who was named CEO to replace Semel, suggested the company was not for sale.

“We are in this for the long haul,” Yang said on the conference call. “The board and I believe that Yahoo is and can and will be a vibrant independent company.”

In a research report, Citigroup media analyst Jason Bazinet said a MySpace deal would be good for both companies, providing Yahoo a foothold in the lucrative social-networking space and News Corp. with access to a broader Internet business.

But the valuation of MySpace — Bazinet believes it is worth about $4.3 billion — could be a big hurdle to overcome.

Bazinet estimated that at $12 billion, MySpace would be valued at 55 times 2008 estimated cash flow of $215 million. More likely, he said, is a 30 times valuation, which would suggest that News Corp. would have to settle for a smaller equity stake (15%) in the combined company.

“Given the potential wide variance in MySpace value between two parties, we think the chances of a transaction are low,” Bazinet wrote.

News Corp. would likely have several competitors in a bid for Yahoo, but at least one potential suitor — Comcast — does not appear to be in the race at least for the moment. At the Sanford Bernstein Strategic Decisions conference in New York in May, Comcast chairman and CEO Brian Roberts, asked specifically about a possible Yahoo buy, dismissed that speculation.

“I think you have to start and say, are you feeling complete?” Roberts said at the conference. “I think we feel complete.”

Yahoo has struggled to gain market share on its chief rival, Internet search leader Google.

Yahoo's share price dipped 35% last year while Google's rose 11%. Yahoo's stock is up about 10% so far this year, but still the Internet search giant has struggled with slow growth and increasing competition.

Semel, who is 64 years old, said on the conference call last Monday he had long been in discussions with Yahoo's board concerning the importance of ensuring a smooth succession in Yahoo's senior leadership.

“As the board and I discuss my future goals and plans, I was clear in telling them of my desire to take a step back from an executive role sooner rather than later,” Semel said. “We, therefore, concluded that this is the time for new executive leadership to step in and drive the company to realize its full potential.”

Yang formed Yahoo in 1994 with David Filo — who, along with Yang, is listed as “Chief Yahoo” on the company's Web site — when both were doctoral students at Stanford University.

But Yang has been somewhat removed from the company's daily operations for years: Semel replaced Tim Koogle, the CEO of Yahoo from 1996 to 2001.

On the conference call, Yang said that Yahoo must intensify its focus on differentiating its product from the growing competition; motivate, develop and attract new talent; reverse the slowing growth in display advertising; and continue to innovate technologically.

But some analysts still question his ability to make the changes necessary for Yahoo to succeed.

“While Yang may provide leadership, we think investors were hoping for more of a fresh start once Semel left,” UBS Securities analyst Ben Schachter wrote in a note last week. “Given Yang's previous position at the company, it's unclear what he plans to change.”

Yang won't be alone. As part of this management change, executive vice president and head of the advertiser and publisher group Susan Decker was named president and will assume leadership of Yahoo's business operations. Filo will oversee the company's technology organization as Yahoo searches for a new chief technology officer.

DOW JONES ON DECK?

While News Corp. mulls a Yahoo play, it appears that one of its major rivals in its quest to gain control of Dow Jones & Co., parent of The Wall Street Journal, has dropped out of the race.

Last Thursday, U.K. publisher Pearson, which owns financial newspaper the Financial Times, said that it had abandoned its discussions with General Electric concerning a possible combination of FT, GE's CNBC cable channel and Dow Jones. It continues to discuss co-operating agreements between CNBC and FT.

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