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Yahoo! Japan Key to YHOO Treasure

The company pointed out that all these shares will be retired. Why? Because suddenly earnings per share will increase significantly.

So the good news for Yahoo! shareholders is that their stake in YJ is worth $8.2 billion today vs. $5 billion a year ago. Net of taxes and fees, that YJ stake is worth $5.07 per Yahoo! share vs. $2.83 per share a year ago.

So why would YJ want to do a deal now with Yahoo! for their 35% stake? Well, I'm sure if they had their druthers, they would have loved to do a deal with Scott Thompson at that discounted price. But even paying off Yahoo! at current prices, YJ would be crazy not to do it.

Just today, YJ's stock was up 15% on good earnings and news of a planned stock buyback to retire 6% of their float. What would it do on news that YJ was going to retire another 35% of their shares -- the equivalent of 244x the daily volume of shares traded? It's worth it to YJ to do a deal with Yahoo!.

What would Yahoo! do with another $5.5 billion of cash net of taxes and fees? Probably buy back a lot of shares.

Yahoo! just retired almost 7% of their shares outstanding in the last quarter for a price of $1.5 billion. They will probably be spending another $1.5 billion this quarter on stock buybacks which -- at say an average cost of $22/share -- would retire another 68 million shares or 6.2% of the shares outstanding.

If a YJ deal happens this year and Yahoo! earmarks $4 billion of the $5.5 billion due to it for buybacks, you are talking about another 150 million shares that could be retired within a year from now (assuming a $26/share average cost). The share count would drop from 1.2 billion as of the end of Q3 to 850 million in a year from now.

At the moment, the analyst consensus on Yahoo! is that it will do $1.27 in EPS in 2014. They're using the old 1.2 billion share count number for that.

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