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Why Apple Should Buy Yahoo!

NEW YORK ( TheStreet) -- Remember watching cartoons, when you were a kid (or now with your kids), featuring pirates desperately searching for a safe place to hide their treasure chests overflowing with gold coins?

Apple (AAPL - Get Report) shares a pirate's dilemma of trying to establish the right location to place its bounty. With the company's cash flow, revenue, income and margins strong and largely growing, investors can expect the problem of what to do with all its cash is not about to go away soon. Of all the problems a company may have, I can't think of a better one. Regardless, it's still a problem.

AAPL Free Cash Flow TTM Chart AAPL Free Cash Flow TTM data by YCharts

What should Apple do with the overflowing war chest it's building? It's a question on everyone's mind from Carl Icahn to the smallest odd-lot investor. Icahn's investment may have grown to over a billion dollars in the iPhone maker. Icahn wants increases in dividends and stock repurchases, and he is known to have significant corporate influence.

A billion dollars gets you a meeting with Tim Cook, but don't expect to impress him. With only a billion dollars, you won't find your name among the guest list for the top 20 largest investors. Anyway, Apple is already buying back shares and has recently increased its dividend. I expect more to come, but Apple can use its war chest to grow and add shareholder value.

One idea I touched on Tuesday in Apple Is Turning Green With Cash is buying Yahoo! (YHOO - Get Report). It's not as crazy of an idea as you may think.

Microsoft's (MSFT - Get Report) CEO Steve Ballmer recognized Yahoo!'s potential value and offered $31 a share in 2008. After the takeover failed and Yahoo! shares plummeted during the financial crisis, Ballmer said, "Sometimes you get lucky."

I think Ballmer correctly understood Yahoo!'s unrealized potential, and was also right that Microsoft dodged a bullet when the deal fell apart at the cusp of imploding valuations. That was so 2008, and now Alibaba's valuation is estimated at a minimum of $50 billion, with a strong justification to place it near $100 billion. Yahoo! owns about 24%, meaning if you use a back of the envelope adjustment, over 60% of Yahoo!'s current market valuation is in cash and investments.
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