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Forget Murdoch: Yahoo! Should Buy Dow Jones

Barry Ritholtz

The media spent the weekend all abuzz over Rupert Murdoch's bold $5 billion bid for Dow Jones(DJ Quote). The synergies between the Wall Street Journal and News Corp.'s(NWS Quote) pending Fox Business Channel makes obvious sense. And despite the pre-existing agreement between Dow Jones and General Electric's(GE Quote) CNBC unit, it would certainly rattle the execs at NBC Universal (GE's media division) -- something you suspect Murdoch might enjoy.

A parallel story line was the resurrection of the Microsoft(MSFT Quote) acquiring Yahoo!(YHOO Quote) rumor that has been around for years. I do not see that as a winning combination. The vast majority of Microsoft's profits come from Office and Windows (Vista), followed by Database SQL. The company's Web properties do not contribute a whole lot to the bottom line.

Then on Monday these two separate M&A stories serendipitously came together when a few subscription-only Barron's columns "accidentally" showed up on the free Yahoo! Finance section. Which got me thinking ...

The most natural acquirer for Dow Jones would be GE (more on this below). But if GE is not interested, then the next most intriguing buyer could be Yahoo!

Its market cap is more than $41 billion, so the company could easily absorb Dow Jones in an all-stock deal, matching Murdoch's $5 billion offer. They would also be a white knight much more acceptable to the major and minor family shareholder groups.

The Bancrofts, who own a majority of the controlling stock, have been rather equivocal in responding to Murdoch's offer. But nearly as important have been the minority shareholders, most prominently, the Ottaway family trust. They released a scathing statement saying that "a takeover by Rupert Murdoch's News Corporation would ruin Dow Jones and its crown jewel, The Wall Street Journal."

All things considered, a combination of Yahoo! and Dow Jones makes much more sense than either a News Corp./DJ pairing or the recently rumored Microsoft/Yahoo! coupling.

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 Quote) 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.

The key to this is which type of online/offline media mergers this would be. The good ones
-- like News Corp.'s acquisition of MySpace, work out terrifically well. The other type? Need I remind you of the debacle known as AOL-Time Warner(TWX Quote)?

The wild card is Semel. He could really shake things up at the company with this merger. I don't know if he could possibly pull this.

The GE Factor

The primary reason GE must be considered is that a News Corp./Dow Jones merger is potentially very bad news for CNBC, which is a a joint venture between NBC and Dow Jones. I would guess that senior people at CNBC are asking (pleading) with GE execs to make a run at Dow Jones, if for no other reason than to keep the WSJ out of Rupert Murdoch's hands.

Murdoch's interest is in using the Dow Jones infrastructure to power News Corp.'s Fox Business Channel, competing soon with CNBC on a cable box near you. A Murdoch-owned Dow Jones could make life very uncomfortable for the folks at CNBC.

It is conceivable that GE could acquire all of Dow Jones, roll all of its many media properties into a single entity, and then do a full spin-off of the stand-alone media venture.

One gets the sense that the media properties are not core GE holdings. They have shown little interest in the travails of CNBC as it is but a small component of their media division. They could roll NBC Universal - including NBC, CNBC, WSJ, Barron's, MarketWatch (see sidebar) into a single media-only entity. GE could then spin off their entire media group as a stand-alone.

I'm not sure if it would be at a higher valuation then they are getting at present: GE, CBS(CBS Quote) and Dow Jones all sport comparable P/Es, and CBS stock is at the same price it was in 1999, when it was a very different company. The entire NBC/WSJ/DJ/CNBC package would be somewhere in the $10 billion to $20 billion range, depending upon the total revenue range of all the media properties included.