Gulf investors should log on to Yahoo

 

The aborted takeover of Yahoo by Microsoft leaves a big question mark over the future of the world's internet industry, and Middle East investors should not sit on the sidelines while this one gets played out. Yahoo is the perfect target for an ambitious telecoms group seeking to acquire a global internet footprint, and I would be very surprised if the Gulf region's big telcos – advised by the armies of corporate financiers who are now seeking refuge in the region – are not number-crunching the financial basics for a possible intervention.

The on-off bid by Microsoft shows just how interdependent the internet business has become, and how it is being integrated into the broader sector of mainstream media. When Microsoft first announced its intention to bid three months ago, it was flagged as the start of a long-awaited consolidation in the sector. Rival potential buyers quickly lined up, with Google the most prominent but followed swiftly by Time Warner (with its AOL internet business) and News Corporation, the media giant owned by Rupert Murdoch and which also has the Myspace and Fox Interactive digital operations.

It looked as though a free-for-all was about to develop over the future of Yahoo, with Google as the lead suitor. The contenders wanted some of the Yahoo business, it is true, but mainly they wanted to stop Microsoft gaining a commanding position in the global internet industry.

Gradually, however, it became apparent that a full-blown bid by Microsoft was the only game in town. The financial logic meant that Yahoo shareholders were keen to consider a full bid, rather than any of the value-enhancing schemes thought up by Jerry Yang and his advisers.

In the end, it all came down to price. Yahoo was willing to sell in principle, but its asking price of $37 per share was a bridge too far for Microsoft, which was prepared to offer $33, valuing Yahoo at $47 billion (Dh172bn). If Steve Balmer, Microsoft's Chief Executive, went further he could be accused of over-paying by his own shareholders.

The fact Yahoos share's fell back when Microsoft withdrew was to be expected, but they did not hit the pre-bid level of just under $20. The conclusion to be drawn from the share price performance is clear – Wall Street expects somebody else to come in with a higher offer in the not too distant future. The bid has put a "floor" under the value of Yahoo on the stock market, and effectively hung a "for sale" sign over the company.

So it would take something in the region of $50bn to get Yang back to the negotiating table. It is hard to see how an organisation such as News Corp could justify that huge outlay; and Time Warner is seen as a potential seller of AOL, rather than a buyer of internet assets.

Now $50bn is a significant sum of money, but it is not beyond the resources of several investment groups in the Middle East, not to mention the huge global private equity business, which is recovering from its state of shock over the credit crisis.

The Middle East is one of the fastest growing parts of the world for the internet industry, and the UAE leads that growth with the highest proportion of web usage in the region. Advertisers and media groups in the Gulf are beginning to realize the potential of the internet as a show-case for their products, and after a slow start are beginning to grasp the possibilities of online business.

A tie-up with a Middle East group would give the buyer critical mass in the global business, and access to the cutting edge technology behind the Yahoo brand. There would be some noises from US protectionists about "foreign" influence in "their" media, but Yahoo is a global, rather than an American brand, and deserves an international element on its share-register to reflect this. In any case, the US competition authorities are likely to impose the strictest conditions on any takeover involving another US company – a Gulf purchaser would be free of those complications.

Nor is it necessary to mount a full takeover bid now. The shares are comparatively cheap at around $25, and a stake of, say, 10 per cent would be a worthwhile exercise by an Arab investor wanting to guarantee a place at the top table for the forthcoming auction of Yahoo.

 

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