Yahoo! Should Buy Dow Jones

The Microsoft/Yahoo! combination makes the least amount of strategic sense. Mister Softee gets less than 5% of its revenue from its online properties. As noted above, Office, various flavors of Windows and SQL generate the lion's share of both revenue and profits. Some analysts have even argued that the entire Web side of the business has been a giant money-losing distraction to the Redmond, Wash., behemoth.

If Microsoft CEO Bill Gates and Yahoo! CEO Terry Semel agree with that assessment and Yahoo! grabs Dow Jones, (pardon the dirty word) the synergies make a lot of sense. They get a primo media property that has a growing Web presence that fits into Yahoo's existing business model. And, it creates a broader network to serve ads, both online and off. It's a strong way to combine the highly-sought-after, high-income demographic of the Dow Jones properties with the high-volume Web traffic Yahoo! generates.

It also adds some bulk to an entity falling increasingly behind archnemesis Google (GOOG - commentary - Cramer's Take) in the online advertising space. Yahoo! could add another $1.783 billion per year in revenue -- a nearly 30% bump for the firm, which did $6.4 billion in total revenue in fiscal 2006 -- and it also adds another $386 million in profits, a number that almost doubles Yahoo!'s profitability.

Yahoo sports a trailing price-to-earnings ratio near 60, while Dow Jones trailing P/E ratio is near 18. If Wall Street puts an online multiple on the revenue, it raises the potential stock price of the combination dramatically.

Yahoo! is a company that presents an interesting merger story. The higher multiple is only half of it. The Bancrofts, the family that controls Dow Jones, may be more receptive to the hands off editorial policy that lives at Yahoo! vs. the more, ahem, active approach credited to Murdoch.

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At the time of publication, Ritholtz and/or his firm was long GE, although holdings can change at any time.

Barry Ritholtz is the chief market strategist for Ritholtz Research, an independent institutional research firm, specializing in the analysis of macroeconomic trends and the capital markets. The firm's variant perspectives are applied to the fixed income, equity and commodity markets, both domestically and internationally. Other areas of research coverage also include consumer, real estate, geopolitics, technology and digital media. Ritholtz is also president of Ritholtz Capital Partners (RCP), a New York based hedge fund. RCP is driven by the analysis performed by Ritholtz Research. Ritholtz appreciates your feedback; click here to send him an email.