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THE DAY AHEAD: Why Yahoo! doesn't need a megamerger

Yahoo! made its best case for staying independent with strong fourth quarter results. Officials did address the AOL Time Warner merger, but the message was clear: we're staying independent.
Written by Larry Dignan, Contributor

Yahoo! made its best case for staying independent with strong fourth quarter results. But that didn't stop officials from spending most of the company's conference call deflecting questions about AOL Time Warner and megamergers.

The convergence conventional wisdom (as if wisdom can be acquired in two days) is that Yahoo will need to team up with a big media partner as traditional media players team up with Internet all-stars. Yahoo's response: We're staying independent.

The AOL Time Warner deal does change the game, but it doesn't mean that Yahoo has to jump into the content business and go proprietary. Yahoo may be the only Net company that can go it alone. And officials are sticking to their guns, shooting down a major merger with a media company.

Of course, you don't honestly think Yahoo would blurt out that it was about to buy a major media player on a conference call web cast do you?

Yahoo could have to change its plans if momentum shifts, but for now the company is doing just fine thank you.

Yahoo beat estimates, issued a 2-for-1 stock split and saw unique users and page views soar. International sites accounted for 13 percent of revenue and Yahoo's e-commerce initiatives are gaining traction.

Here's why Yahoo will do just fine without those old media types:

Yahoo is content agnostic

Now that most Internet companies are shacked up media players and their properties, Yahoo's independence is a strength. There's a lot of profit in being the Switzerland of the Internet.

Infoseek went with Disney content. NBCi features NBC content. And AOL will most likely give preference to Time Warner's assets. That's synergy. That's also a bit limiting when it comes to consumer choice.

Chances are good all these old media combatants will have to go to Yahoo to get distribution because it's one of the few agnostic Net companies left. Yahoo will team up with a traditional media power, but it won't limit itself to one deal.

CEO Tim Koogle said Yahoo will partner with as many content providers as possible and be available on all platforms. Koogle also said context and choice is king, not just content.

Yahoo operates from a position of strength

When you cook the AOL Time Warner deal down, both companies had weak spots that needed fixing. AOL faced a future with free Internet access and needed the cable pipes. Time Warner was an Internet failure.

Yahoo doesn't have any problems looming on the horizon

In December, Yahoo! reported more than 120 million unique users, doubling the 60 million users it recorded in the year-ago quarter.

Its registered user base grew to more than 100 million users, well above the 90 million expected by most analysts. Its combined home and work users reach shot up to 64.7 percent in November, up from 49.6 percent in the same period last year.

Yahoo is a leading distribution platform and aggregates a lot of eyeballs. Content always finds distribution and distribution always finds content.

Yahoo doesn't need the broadband pipes

Yahoo is well positioned to be a broadband player and it doesn't necessarily need to own the cable pipes.

Koogle said Yahoo will invest heavily on Broadcast.com and streaming content in the upcoming year. That investment will crimp margins slightly for the next three quarters.

According to Koogle, 50 percent of Yahoo's users come in on broadband connections. And if AT&T and AOL stick to their open cable access rhetoric, it could be a positive for Yahoo, said Koogle.

And let's not forget the power of branding. Let's say the broadband world develops according to AT&T's and AOL's master plan. Most cable homes will be seeing ExciteAtHome and Time Warner content first. Big deal. Yahoo's brand is powerful enough to attract folks anyway. Yahoo is only a click away.

Yahoo is strong abroad

The future of Yahoo is overseas. And Yahoo is better positioned than America Online, which hasn't been an international powerhouse (gee think it's the name?)

CFO Gary Valenzuela said international revenue accounts for 13 percent of sales in the fourth quarter and Yahoo is rolling out new international sites at a rapid clip. Yahoo Japan is a big hit and Yahoo Europe is growing. Yahoo will also be a big player in China.

Yahoo now operates in 21 countries outside the US and is implementing new e-commerce features.

Yahoo can buy small

There's a good reason Yahoo isn't looking for a megamerger -- big deals take a long time to implement and most fail to deliver.

Watch AOL shares over the next few months for evidence. Investors are already skittish about old media growth rates.

Buying small is a good strategy. Yahoo can buy promising young companies and scale them quickly on its platform, The company integrated seven acquisitions in 1999 and is likely to buy more companies to fill in its strategy. As for the content is king talk, Yahoo may buy a few targeted content providers, but don't expect much more.

Indeed, Yahoo is making sure it has the cash to do deals. Yahoo has nearly $1bn in cash and is filing today to issue $750m worth of shares just to do deals.

Valenzuela said the new shares won't be used for cash, but for deals. Do deals quickly, think small and pay with inflated stock is Yahoo's acquisition motto.

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