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Are Yahoo's Days Numbered? (YHOO, MSFT, GOOG)

Ian Wyatt

The most visited U.S. web portal may soon be bought out by the biggest e-commerce company in China.

Jack Ma, the chairman of the Chinese Internet conglomerate Alibaba Group, said last week that he is "very interested" in buying Yahoo! Inc. (Nasdaq:YHOO - News). Now Bloomberg is reporting that Alibaba is collaborating with Silver Lake, a private-equity firm, and Russia's Digital Sky Technologies on a potential deal to buy Yahoo.

Oh how the mighty have fallen! Three years ago Yahoo was powerful enough to turn down a $47.5 billion takeover offer from Microsoft (Nasdaq:MSFT - News). Today, Yahoo's market value is a comparatively paltry $18 billion. Yahoo's stock had dropped nearly 20 percent this year prior to receiving a 4 percent bump yesterday after news of Alibaba's potential takeover leaked.

The five-year chart of Yahoo's stock below puts all of this in context.

Six years ago the tables were completely turned.  It was then that Ma sold 40 percent of Alibaba to Yahoo. Now, apparently, Ma wants Yahoo to sell its Alibaba stake back - and then some.

The timing for the potential takeover makes sense. Yahoo fired CEO Carol Bartz last month after the company stagnated on her watch, its stock price slumping and its advertisers bolting for hipper rivals such as Google (Nasdaq:GOOG - News) and Facebook.

But Bartz's unsuccessful reign merely extended Yahoo's recent downward spiral. Like AOL, Yahoo was once on the cutting edge during the Internet's rise. It capitalized on people's shift to consuming written material online rather than in newspapers and magazines. Now, however, social networking and mobile devices are all the rage, with Facebook and Google leading the charge.

Like its fellow Internet pioneer AOL, Yahoo has fallen behind the times.

So Alibaba's potential buyout could be a turning point for Yahoo. Alibaba Group is valued at $32 billion - nearly twice Yahoo's value. But this M&A deal is fraught with roadblocks.

For one, U.S. regulators don't always take kindly to foreign takeovers, especially in the communications industry. Three years ago a deal between China's Huawei Technologies and Massachusetts-based computer-equipment company 3Com Corp. fell through after the U.S. government raised questions about whether it would give China access to technologies used by America's Defense Department.

Needless to say, freedom of the press and rights to free speech in the U.S. are vastly different from those in China.  

Another potential pothole is that the Alibaba-Yahoo relationship has long been strained, despite its now six-year-old partnership. Bartz burned a lot of bridges with her handling of Yahoo's Alibaba stake, prompting Alibaba to spin off its profitable Alipay business without compensating its Yahoo shareholders until much later.

Plus, there's the simple embarrassment Yahoo is likely to feel by selling to a company it currently owns a stake in. That's yet another image hit Yahoo officials might not be willing to take.

Bottom line - we don't yet know if this deal will happen but there are many fascinating angles from which to watch events unfold. With a volatile market, and an ever increasing pace of change in media technologies as the backdrop, a major M&A deal like this right now would likely get the talking heads gabbing about a potential bottom in the market as well.

For investors, that alone may just be more important than the future of Yahoo.

Disclosure: Author owns shares of GOOG

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