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Stock Analyst Update

Yahoo Buyout Bandwagon Lacks Wheels

The firm should be valued on fundamental outlook, which is weakening.

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What Happened?
Yahoo (YHOO) has been on a tear lately, fueled by buyout speculation. The stock was up 33% in the past four trading sessions, culminating in a 14% gain Thursday before edging lower Friday morning. According to rumors, interested buyers may include Viacom (VIA) or other media giants.

What It Means for Investors
Given the company's weakening outlook, we believe the stock is too expensive at these levels. Each of the companies rumored to be interested in Yahoo--Viacom, Disney (DIS), and News Corp. (NWS)--has good reason not be in the running. They are likely to balk at paying any premium for a stock that trades at more than 90 times Zacks expected earnings for this year and which would be highly dilutive to their earnings. Viacom is integrating CBS and has the Infinity (INF) acquisition pending. Disney seems the least likely to pay a rich premium, given its strategy of reducing capital costs and turning around its consumer and film businesses. News Corp. would offer the most benefit with its worldwide distribution network, but seems clearly focused on acquiring Hughes (GMH) and spinning off Sky Broadcast Network.

George Nichols does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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