The Wall Street Journal-20080206-Common Sense- Here-s a Play- Buy Google- Hold Yahoo for Sweetening
Return to: The_Wall_Street_Journal-20080206
Common Sense: Here's a Play: Buy Google, Hold Yahoo for Sweetening
Full Text (598 words)SmartMoney
Now it's the battle of the titans: Google vs. Microsoft.
Somehow we knew this day was coming, and yet the boldness of Microsoft's $44.6 billion bid for Yahoo is still breathtaking. Make no mistake about it: This is all-out war, and it will be waged on many fronts with enormous implications for investors and society at large.
Readers may be well aware that I own Google shares and Yahoo shares, and only recently sold the Microsoft stake I acquired after recommending it last year. While I'm hardly a disinterested observer, as an investor I need to be a dispassionate one.
On the business front, the three major search engines would shrink to two if Microsoft succeeds. This recognizes what has become increasingly obvious: Google is winning the search-engine war. Internet searches appear to be a natural monopoly in which users will gravitate toward a single provider. This is because the more searches performed, the more finely tuned are the algorithms for the next search, and the better the results. Google has steadily gained U.S. market share, which now stands at about 65%.
In this sense, a Microsoft-Yahoo combination strikes me as likely to be about as successful against Google as the Sears-Kmart merger was against Wal-Mart Stores. Still, there would be big cost savings; Microsoft estimates at least $1 billion in annual synergies.
But search engines aren't the whole story. There's email and instant messaging. Microsoft would also gain something it has desperately wanted and has failed to create on its own: a huge online presence in content creation. Here Yahoo remains a viable competitor and has advantages of scale.
What gives me pause is Google's efforts to undermine the proposed combination by waving the antitrust flag and proposing its own relationship with Yahoo. Its proposal to take over Yahoo's search operations certainly raises antitrust concerns at least as large as the ones it's accusing Microsoft of. My advice to Google: Stick to the high road and let others take up the antitrust cudgels, as they surely will.
That's not to say there aren't real antitrust issues here. Merging the No. 2 and No. 3 competitors in search risks high market concentration, if the market is defined as Internet search. Microsoft should be able to make the case that the merger will actually promote competition, but it won't be easy, and it will take time.
Now the investment implications: Yahoo's options are limited. It either has to attract another offer or extract a higher price from Microsoft. Microsoft would surely pay more for a friendly victory. So I'm going to wait for at least the next round of bidding before doing anything with my Yahoo shares. Once Yahoo reaches a deal, it may be time to sell.
As for Google, this strikes me as a remarkable buying opportunity. I said that last week, too, and my conviction is even stronger now that the stock has fallen nearly 10% since. Google's drop of more than 8% last Friday was sobering, but consider this: Intel fell 12% on one day in 1997; Cisco Systems shed more than 14% on one day in 1991; and Wal- Mart dropped nearly 8% in a single day five times from 1990 to 1999. These were the kinds of stocks that nonetheless delivered some of the top returns and were stunning success stories of their eras.
---
James B. Stewart, a columnist for SmartMoney magazine and SmartMoney.com, writes weekly about his personal investing strategy. Unlike Dow Jones reporters, he may have positions in the stocks he writes about. For his past columns, see: www.smartmoney.com/commonsense.
