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Rumor Mill Swings Into Gear on Yahoo! Trading Halt

George Mannes

Updated from 10:06 a.m. EST:

Speculation swirled around Wall Street Wednesday about the fate of Internet giant Yahoo! (YHOO) after the company backed out of an appearance at an Internet conference and trading in its shares was halted. The company said it would issue a postclose press release and hold a 5:15 p.m. conference call, though it declined to specify the subject.

The possibility that Yahoo! might be a buyer or seller in a major transaction has been a staple of the Internet-deal rumor mill for years, co-starring a host of big media and Internet companies running from Disney (DIS) to eBay (EBAY). Also on traders' radar screens was the notion that Yahoo! could warn of an earnings shortfall, as the Net ad market has been notoriously weak and big newspaper publishers have begun warning of weakening results for February.

Shareholders Have Rights, Too

Fueling takeover speculation last week was Yahoo!'s adoption of a shareholder rights plan, which the company said was designed to deter "coercive takeover tactics," such as accumulation of shares in the open market, and to prevent someone from acquiring control of Yahoo! without paying a premium.

Idle pundits have long wondered if and when Yahoo! might hook up with a major media company, even before fellow Internet denizen America Online announced the deal to create AOL Time Warner (AOL) in January 2001. Yahoo! executives, however, have never confessed to any urgency to ally themselves with a single old-media firm. And while the idea of marrying new media and old media has a felicitous ring to it, the money-pit adventures of Disney and GE (GE) affiliate NBC Internet (NBCI) show that such marriages can quickly sour.

Yahoo!'s shares, though still pricey by some measures -- the company has a forward price-to-earnings ratio in the neighborhood of 60 -- look like a bargain compared to where they've been. The stock, which was trading at $20.50 Wednesday morning, closed as high as $237.50 in January 2000.

Although cancellations of investment conference appearances usually fall into the dog-bites-man news category, Merrill's Henry Blodget put out a research report Wednesday saying he'd never known of Yahoo! to back out the day before it was scheduled to speak.

Exploring four commonplace reasons for last-minute cancellations, Blodget didn't rule out any of those possibilities for Yahoo!: an earnings miss, a major acquisition, Yahoo!'s acquisition by another company or a management change.

Whatever the reason, Yahoo! clearly faces a tough road ahead. After guiding analysts' estimates way down for its first quarter financials, Yahoo!, like other Internet firms, is banking on a bounceback later in the year to meet full-year 2001 revenue targets.

On Tuesday, as Goldman Sachs analyst Anthony Noto assumed coverage of Yahoo!, he lowered his firm's rating on the company from recommended list to market outperform. Noto lowered his 2001 revenue and earnings estimates for Yahoo! and said the lower rating better reflected "the weakening economic environment and secular uncertainty during Yahoo!'s transition from a primarily Web advertising-based model to a three-pronged business built on ad/commerce, premium consumer services and business services." Goldman has done corporate finance work for Yahoo!.

Last week, Salomon Smith Barney analyst Lanny Baker issued a 57-page report calling a combined Yahoo!-eBay "a company that would sustain industry leadership, revenue growth, and large-cap status by virtue of improved revenue diversification, leveraged profitability, and the power of two of the Internet's strongest native brands."