Novice Investing - Turning $ 1 Billion Into Lead

Date: Friday 29th 2008f August 2008 12:35:41 PM

Turning $ 1 Billion Into Lead - 09/22/2006

By: Hari Wibowo

Many people dreams of converting lead into gold. But for most of us, we are really good at turning gold into lead. Enter the struggling Yahoo! (YHOO) into the foray of social networking. With advertising struggles this past quarter, Yahoo! is looking of ways to boost its web dominance by, among other, having deep discussion to acquire Facebook for $ 1 Billion. Back in March 2006, Facebook rejected a $ 750 Million offer and aiming for as high as $ 2 Billion.

Now, while I think $1 Billion is a high figure for an industry that as fragile as social networking (where is friendster these days?), it is a lot more reasonable than the $ 2 Billion Facebook was asking for back in Spring. While the future may lie with successfully connecting everyone on the web, a pure social networking site will not survive the battle on its own. Hooking up with larger more established player is a sensible answer and Yahoo! should not over pay for Facebook in this respect.

With $ 1 Billion to spend, companies can have better alternatives. For example: Yahoo! can buy Earthlink (ELNK) for a net price of $ 550 Million (due to its cash on balance sheet) getting millions of dial-up customers and its own social networking site (albeit small). Do you think Yahoo! can entice Earthlink's subscribers to sign up for its own version of social networking site? Of course it can.

How about acquiring The Knot Inc. (KNOT) for $ 500 Million and change? This company operates a wedding online and offline service, which is about as complicated as it gets for building a credible social networking site on its own.

You see, there are a lot of other alternatives other than buying unproven startup in a fragile industry. Further, companies that seem to think too highly of themselves should be avoided as buyers will be more likely to be disappointed. News Corp snatched a good deal by paying $ 580 Million for MySpace. Yahoo! may not do the same by snatching Facebook for $ 1 Billion, let alone $ 2 Billion it was asking for this past spring. Yahoo! should not rush to make a deal just because it has several bad quarters.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Yahoo! Inc. (YHOO) or any other securities.

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