The Only Way Investors Will Make Money In Yahoo! Is Through A Buyout (YHOO, GOOG, MSFT)

Yahoo! Inc.

released its Q4 earnings results yesterday after the closing bell. The company reported adjusted net income of $340.5 million or $0.26 per share compared to $200.2 million or $0.14 per share in the year ago period. This came in moderately ahead of analysts' consensus EPS estimates of $0.22. Excluding traffic acquisition costs (

), revenue was down 4% from last year to $1.21 billion from $1.26 billion. This also offered moderate upside to Street consensus of $1.19 billion. For fiscal 2010, revenues fell to $6.32 billion from $6.46 billion. Looking to the first quarter, YHOO sees ex-TAC revenue of $1.020 billion to $1.080 billion, which is below analysts' consensus of $1.13 billion. Although Asia Pacific revenues continue to rise substantially as a result of the company's stake in Alibaba and Yahoo Japan, revenue in the America's fell a whopping 22% to $990.7 million for the quarter. In its largest markets, YHOO is being cannibalized at an alarming rate. This is evidenced by the 27% decline in search revenue for Q4, which was only partially offset by a 14% rise in display add revenue. Display contributed $635 million while search added $640 million. The cannibalization of the company's core businesses is further seen in job cuts that are taking place at Yahoo. This week, the company slashed 1% of its global workforce and revealed plans to reduce its total workforce by about 4%. Google

, on the other hand, is adding jobs at a furious pace in an effort to continue to grow the top line. Yahoo's strategy, on the other hand, is one of basically admitting defeat - the company is attempting to focus on margin growth as opposed to increasing the top line. While margins did show a nice boost in the quarter, this strategy is unlikely to meaningfully lift YHOO's share price over any extended period of time if revenues continue to deteriorate. Given this backdrop, it appears that the only way shareholders are going to be rewarded for their investment is through a buyout of the company - but the company's management still appears resistant to such an outcome. One very prominent investor who appears to have come to the same conclusion is Carl Icahn, who was once a large shareholder in the company. Icahn, however, liquidated his 4+ million share position between June and September of 2010 - not a ringing endorsement. While Yahoo's core businesses are struggling mightily, and it is hard to see how these businesses will be able to create long-term shareholder value, the company's Asian assets are extremely valuable. Yahoo has a 39% stake in Alibaba, which accounts for a significant portion of YHOO's market cap. The problem is that Alibaba wants nothing to do with Yahoo and relations between the two companies have been contentious. Last May, Alibaba offered to buy back Yahoo's stake, and was summarily dismissed by CEO Carol Bartz. Making matters worse for the company is that its Asian assets are not really adding strategic value to Yahoo's core business. The company's inability to create shareholder value has been incredibly consistent and angered big investors. Yahoo pays no dividend. Its share price has fallen 2.87% in the last year, vastly underperforming the market. In the last 5 years the stock has plunged 54%. That is failure, plain and simple. Making matters worse, is the fact that the company's management and founder Jerry Yang, showed substantial hubris and delusion when it rejected Microsoft's

$33 per share offer in 2008. It now appears nearly impossible that such a favorable outcome will come about for the faltering tech outfit. Yahoo cannot compete. Period. Google

and now Facebook are causing significant and consistent deterioration in the company's core businesses. Furthermore, Bartz and her management team appear to have finally admitted as much by telling investors they are going to focus on margins instead of growing the top line. The only hope for YHOO and its shareholders to avoid disaster in the coming years is to agree to be acquired. Hopefully, management will be more receptive than they were in 2008. In October 2010, the Wall Street Journal reported that AOL

and several private-equity shops were exploring an offer for the company. The only reason that investors should be sniffing around YHOO right now is in the hope that the company's management comes to its senses and seeks a buyer. Yes, YHOO's Asian assets are very compelling, but the core business is deteriorating and does not look positioned to compete with Google and Facebook in any meaningful way going forward. Yahoo trades at a trailing P/E of 20.19, a forward P/E of 19.68 and a PEG ratio of 1.43. Google trades at a trailing P/E of 23.50, a forward P/E of 15.45, and a PEG ratio of 0.98. Google is substantially cheaper than Yahoo. You do the math. Which one of these company's do you want to own?