Yahoo's last chance

March 12, 2008: 12:27 PM ET
Yahoo headquarters
In six weeks, Yahoo will get one more chance to prove it can turn things around without Microsoft. Courtesy of Yahoo.
Yahoo YTD
Yahoo stock spiked after Microsoft's bid, reclaiming levels it last saw in November when investors were more optimistic.

Six weeks ago, Microsoft CEO Steve Ballmer sent shockwaves through the tech world when he offered more than $40 billion to buy Yahoo. And about six weeks from now, Yahoo's unwilling executives may have their last, best chance to wiggle free of Ballmer's grip.

That's because late next month, Yahoo will present its latest earnings numbers to Wall Street. Investors will pick through the sales and profit numbers, ask incisive questions, and potentially bid its stock price up or down, effectively tipping the scales in favor of either Yahoo (YHOO) or Microsoft (MSFT).

It could be Yahoo's final opportunity to prove it can thrive on its own. For nearly a year, investors waited for CEO Jerry Yang to deliver his promised shakeup and begin taking market share from Google (GOOG). But Yang was slow to trim staff or make other changes, and the stock lost nearly a third of its value on his watch. That set the stage for Yahoo's annual meeting sometime this summer, where Microsoft is expected to try ousting Yahoo's board and installing directors who will bless its takeover plans.

Analysts don't expect much from Yahoo. On average, they expect revenue of $1.32 billion, which is at the low end of the range that executives gave in January.

Make no mistake, earnings results can play a role in acquisition talks. After all, it was Yahoo's last round of earnings numbers in January that made it easy prey. First Microsoft wowed Wall Street with outsize profits, then Yahoo disappointed, sinking its stock below $20. No doubt smelling blood, Microsoft pounced three days later with a buyout offer for Yahoo at $31 per share.

For a sense of how earnings reports can change the tone of an acquisition, consider Oracle's (ORCL) pursuit of BEA Systems (BEAS) late last year. When Oracle CEO Larry Ellison began stalking BEA in October, he offered $6.7 billion for the software maker, and declared it his final offer. But BEA argued that its earnings report would prove the company was worth more.

When the earnings report proved exactly that, investors were pleased, BEA management dug in, and Oracle ended up spending another $1 billion to capture its prize. (It's worth noting that despite its earnings coup, BEA didn't escape Oracle – it simply managed to hold out for more money.)

Such a scenario might be little more than a fairy tale for Yahoo at this stage. With online ad revenues generally sagging this year, there's little reason to expect the online company's results will exceed investor expectations. After all, Google, the king of online ads, has seen its stock decline by more than a third since the beginning of the year amid signs that its search-based ads are bringing in less money than they once did. If Google is feeling the heat, the reasoning goes, Yahoo can't be immune. (Of course, there's a chance that Yahoo could pull off a surprise by controlling costs and exceeding Wall Street's modest expectations.)

For now, there's little to do but guess what might happen next. Microsoft and Yahoo have been quiet for most of this week, with Yahoo reportedly in talks with Time Warner (TWX) about a possible matchup with its AOL unit. (Time Warner is the parent company of Fortune and CNNMoney.) And Yahoo is clearly trying to buy time; last week the company announced that it would delay its annual meeting, effectively giving Microsoft more time to formally begin its attempt to take over Yahoo's board.

A source on Microsoft's side of the negotiations says the software giant is patiently biding its time. Microsoft could still officially launch its hostile bid at any moment, beginning a battle for the hearts of shareholders.

And from where Microsoft sits, that's a battle it's likely to win; after all, it's offering $40 billion, and Yahoo so far hasn't come up with any other offers.

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