YHOO 12.16.08

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Equity Mkt. Cap. $17B

Ent. Value $15B

ROE 8.9%ROA 2.5%Bk Value /Share 8.36

Financial Statistics

EPS

EPS P/

2006A $0.51 46.3x

2007A $0.54 33.1x2008E $0.38 23.7x2009E $0.43 29.6x

EBITDA

FCF/ EBITDA

EVEBITDA

2006A $1.4B 35.5x2007A $1.3B 21.0x2008E $1.3B 18.8x2009E $1.3B 8.3x

December 16, 200

Brian Bolan(312) 345-1534

[email protected]

Important disclosures appear on the inside cover and back of this publication.

Yahoo! (OTC: YHOO - $12.73)

Long Term Rating: Market PerformLong Term Target Price: $12

Mid-Atlantic Institutional Research

Investment Summary: After a tumultuous year, Yahoo! is in search of new leadership to do one of two things, clean up the company for a sale or point the ship in an entirely new direction. Either task is a difficult one considering the weak overall advertising market, continued loss of market share and the brain drain that occurred following the Microsoft offer and subsequent layoffs. Webelieve there is a M&A premium in the stock, but we estimate fair value of a take out to be about $16. The stock is at multi-year lows but we still do not find the valuation compelling. We are initi-ating coverage of Yahoo! with a Market Perform rating and a one-year price target of $12.

Key Points

Near term weakness in overall advertising market hurts Yahoo!. Recent reports suggestthat advertisers continue to decrease spending even more than what was reported only amonth ago. This decrease in advertising dollars will likely hurt Yahoo! more than most of itscompetitors as its exposure to its affiliate network and display sites are not aided as much bythe growth in search.

Market share continues to decrease. Third party metrics show Yahoo! losing share to itschief rival Google. Recent indications of traffic reductions across the entire Yahoo! network suggest further weakness in both its search and display businesses.

Management has been the Achilles Heal for the company over the last year. The desireto remain independent prompted Yahoo! management to spurn an offer of $31 per share fromMicrosoft and attempt a search deal with Google. The company awaits a new CEO whichcould signal a new direction for the company or a short term tune up for a sale.

Projected growth is well below that of the rest of the industry. We estimate net revenuesto be flat in 2009, something that growth investors would not want to see. We see littlegrowth coming from core segments as well as emerging products. We rate the stock a MarketPerform and have price target of $12, which represents a multiple of 28x our 2009 earningsestimate.

Initiating Coverage: Weakness expected, waiting for CEO

Source: BigCharts, CompanyReports and Sturdivant & Co. Estimates.

Relative Daily Price 12/16/08

Price 12/16 $12.73

52 Wk Lo $30.25

52 Wk Hi $8.94Avg. Volume 29.7MInsiders Own 15.9%S&P 500 868.57

Share Information

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S TURDIVANT & C O ., I NC .

Mr. Bolan does not own shares of Google

Disclosures

Rating System DefinitionsSturdivant & Co.s stock ratings system reflects the investment decisions our clients face every day, and is meant to assist clients in making these decisions by recommending aspecific action to take with each stock we cover. All of the ratings correspond to a specific investment action that we recommend taking on the date the research is published. Thus,Outperform (equivalent to Buy) ratings are reserved only for stocks that we would be actively buying at the time the research is published. Marketperform (equivalent toHold) ratings are reserved for stocks that we believe are in line with the markets anticipated performance and we recommend holding. Underperform (equivalent to Sell)ratings are assigned to stocks where the analyst anticipates stock price declines relative to the market. Please note also that the price expectations that determine the rating are inabsolute dollar terms, not in terms of relative performance to a sector or an index. Therefore, analysts will not use the Outperform rating for stocks that are expected to performwell relative to their sector but only for stocks that are expected to appreciate in actual dollar returns.Research Analyst CompensationAnalyst compensation is based on: (1) the analysts productivity, including the quality of the analysts research and the analysts contribution to the growth and development of ouroverall research effort; (2) ratings and direct feedback from our investing clients, our sales force and from independent rating services. Sturdivant & Co.s Compliance and Re-search Departments are responsible for establishing these compensation guidelines and for reviewing and approving senior analyst compensation. Analyst contribution to ourinvestment banking business is not a factor in determining analyst compensation and compensation is not, directly or indirectly, related to the specific recommendations or viewsexpressed in the report.Research Analyst CertificationThe senior research analyst(s) certifies that the views expressed in this research report and/or financial model accurately reflect such senior analyst's personal views about thesubject securities or issuers and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in theresearch report. Mr. Bolan does not own shares of Yahoo!. This is not a complete analysis of every material fact regarding any company, industry or security. The opinions ex-pressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee theaccuracy. The Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 are examples of unmanaged common stock indices used to measure and report performance of various sectors of the stock market; direct investment in indices is not available. A complete listing of all companies covered by Sturdivant & Co., Inc. and applicable researchdisclosures can be obtained from the Company. Price Target RisksInvestment risks associated with the achievement of the price target include, but are not limited to, the companys failure to achieve our earnings and revenue estimates, unforeseenmacroeconomic and/or industry events that adversely impact demand for the companys products or services, product obsolescence, changes in investor sentiment regarding thespecific company or industry, intense and rapidly changing competitive pressures, the continuing development of industry standards, the companys ability to compete for talent,and adverse market conditions. For a complete discussion of the risk factors that could affect the market price of the companys shares, refer to the most recent form 10-Q or 10-Kthat the company has filed with the SEC.

Source: BigCharts

STOCK PRICE PERFORMANCE

Rating and Price Target History for Yahoo! (YHOO) as of 12/16/08

12/16/08MP: $12.72T: $12

YHOO Daily 12/16/08

MP: Market Perform; T: Target

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Table of Contents

Company Introduction 4

Key Products 4

Growing through Acquisition 4Selected Acquisitions 4

Evolution of the Search Business Model 5

Industry Outlook 5Where the Growth will come from in the Industry 6

Market Share 6Yahoo Market Share Graph 6Monthly Market Share Table 7Yahoo Search Volume Growth vs Universe 7

Seasonality 8

Microsoft Acquisition and Recent Events 8

Layoffs and Change of Control Adjustments 8

Management Discussion 8 Click Fraud 9

Investment Risks 9

Valuation 10Yahoo Search Revenue 10Google Owned vs. Yahoo! Owned 11

Income Statement 13

Institutional Contacts 14

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Introduction to Yahoo!

Yet Another Hierarchical Officious Oracle is the acronym for Yahoo!. Yahoo! was first made available in 1994,and the company has been growing ever since. In 1996, the company had 49 employees and went public.

Key Products

As content poured onto the Internet, it was apparent that search engines would be needed to organize and rank thecontent based on a simple text search. This keyword search is the basis for how the search engine locates webpages based on the words that a user types in. This is also the mechanism that has propelled billions of advertisingdollars to the internet in the form of banner ads, sponsored links and graphic splash pages among others. It wasntuntil Yahoo! purchased Overture in 2003 that the company finally became a principal in the search business as itsought to monetize what was a nascent business.

Yahoo! has always been about attracting a large number of users and the company quickly moved to be more than just a search engine to become a media platform. Media offerings include, but are not limited to, Yahoo! Email(275M users), Yahoo! Messenger (116 M users), Yahoo! Music Experience and numerous Yahoo! properties thathave been visited by more than 500 million people.

The company has embraced a recent renaissance of social networking with its purchases of Flickr and socialtagging concern Del.icio.us. Given the issues surrounding the companys fate, we do not expect any otheracquisitions for some time to come.

Growth through Acquis i t ions

Yahoo has grown over the years and has done so mostly via acquisition. Notable large acquisitions in the pastinclude Mark Cubans Broadcast.com (streaming media), Overture (payment solution for advertising) and HotJobs(Job Search). Yahoo! then shifted its focus to the smaller developing companies in the internet such as Flickr(photo hosting) and Del.icio.us (social tagging).

More recently, Yahoo! spent more on its advertising platform as opposed to growing the display network. Theacquisition of Right Media brought a competing model for internet advertising and Blue Lithium increased the AdNetwork that Yahoo! already had. These larger acquisitions were a departure from the build out of the display sideof the business that saw acquisitions like Rivals.com and BuzzTracker. The move away from content and towardsadvertisers didnt stop the traffic from coming to Yahoo!, but it hasnt helped produce much in the way of effectiveness for its search or display lines.

With Yahoo!s stock making new 52 week lows, we believe that it is unlikely that the company will be asacquisitive as it has been in the past. The combination of a weaker marketplace currency (low stock price), the cut

Target Date Announc ed Purc hase Pric e CommentBroadcast .com 4/1/1999 $4.65B Streaming media platform founded by Mark CubanOverture 7/14/2003 $1.37B Yahoo! becomes a princ ipal in the search businessHotJobs.com 12/12/2001 $436M A distant third in the job search market

Flickr 3/20/2005

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back in advertising budgets and general slow down in venture capital will keep Yahoo! on the M&A sidelines.

Evolution of the Search Business Model

The first business model in the search business employed the cost per thousand or CPM method. This is a standard

term in the advertising business and basically means that for every thousand views a buyer pays X amount. Whilethis number is hard to track for mediums such as newspapers or billboards, it can be specifically tracked and placedin high value areas (targeted) for the advertiser. The internet model then moved to a cost per click (CPC), wherethe advertiser would only pay for each click on the advertisement as opposed to the paying for just a viewing of thead. This fostered the idea of a click through rate (CTR). For example, if an advertisement was run as a result of akeyword search 1000 times, and clicked on 24 times, it would have a click through rate of 2.4%.

As a leader in the monetization of the search tool, Yahoo! has been able to adapt with the competition. Googlesrelease of Checkout (6/29/06) was touted as the foundation for a new shift in the advertising model. After beingsubsidized in hopes to get more advertisers and consumers on the platform Checkout seems to have lostmomentum. Yahoo! launched its Wallet application in 1999 and it is fully integrated with the entire platform.This application will be a critical integration when the CPA (Cost Per Action) model begins to take hold withadvertisers.

When we spoke to representatives at Yahoo!, they noted that while there are rumblings of a shift in the model,many advertisers still are quite happy with the CPM model and the CPC model. The CPM model is one thatadvertisers are quite familiar with and while the other models offer better tracking and ROI equations, the endgame is still the same. Management also pointed out that there was similar buzz surrounding a model known asClick to Call, which enabled a VoIP based toll free line in a banner ad but has yet to overtake the traditionalmodels.

Industry Outlook

The internet search market used to be a wide open space that had several major competitors. While some smallerplayers are still around, the majority of the attention in the space is focused on Google, Yahoo! and Microsoft.Other companies like Time Warners AOL unit and Ask.com are still relevant in terms of market share, but fewothers have been able to make or sustain an impact in the industry. Search has become as much of a starting pointfor users as portals were in the early days of the internet bubble. Yahoo! made being the starting point for users akey strategic initiative, demonstrating the importance of being first. Whether users prefer content on the startingpage or just a clean user interface, it is clear that search is a dominate platform for the internet and will be for sometime to come.

Taking the search engine beyond the search home page has been the goal of the major search companies over thelast several years. They have utilized the ability to quickly index a page, scan it for keywords and phrases anddeliver highly targeted ads that match the content of the specific page. This played out most dramatically in thesocial networking space as Google outbid competitors to deliver ads to one of the hottest internet plays in years,the News Corp owned MySpace (8/8/06). The deal focused on better monetizing the massive traffic on the siteand led its major competitor to enlist the help of Microsoft to serve its ads. The difference in the two deals was a$15B valuation that was given to Facebook by Microsoft via a minority stake investment. With the investment,

Microsoft became the ad serving agent for Facebook, the popular social networking site.A watershed moment came during the 4Q07 Google earnings conference call. The company noted that it wasfacing challenges in monetizing the traffic that MySpace was generating. Microsoft sensed weakness and movedto attempt to level the playing field in the search space by making a $46B bid for Yahoo!. An arduous fightensued as Yahoo! determined to remain independent struck an accord with Google in an effort to escapeMicrosofts bear hug. Yahoo! successfully thwarted the takeover attempt, however it continues to see its marketshare decrease. Microsoft has abandoned its quest for Yahoo! (for now) and has moved to the Club Live searchwhich gives prizes to users that consistently use its search application.

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Where the Growth will come from in the Industry

Much has already been said about the shift of ad budgets to online from offline. We believe this trend willcontinue, but just as that trend continues to accelerate, another segment is at its nascent stage. Mobile phones

have become more sophisticated in the last few years, with BlackBerry maker Research in Motion leading theway. What was a battle between BlackBerry and Palm has turned into a race with several competitors, the least of which is Apples iPhone. The rich content of the web has shifted from the PC to the smartphone. The potential totarget consumers via tracking movement and purchases subsidized via advertising could significantly change howcommerce is enacted.

As new technology comes to market, we believe that consumers will embrace smartphones and their features. Itmay be some time before consumers are willing to allow for web-based payments to take share from credit cards,but it is something that makes sense over the long term.

Market Share

Over the last several years, market share has been measured by several companies that purchase the clickstreamof users from internet service providers (ISP). This raw data is analyzed to determine how many searches weremade in a specific time frame (generally one month) and where they were made. This data is not fully endorsedby the search companies, but the trends are usually in agreement with the internal logs at the search companies.

22.8%

22.4%

22.9%

22.2%

21.6%21.3%

20.4%20.6%

20.9%

20.5%

19.7%

20.2%20.5%

18.0%

19.0%

20.0%

21.0%

22.0%

23.0%

24.0%

Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08

Yahoo Market Share

6


Source: comScore qSearch

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Over the last several months, it has been apparent that Google is the dominant search company with almost 70% of the market as tabulated by Compete.com. We believe that Googles market share of search will continue to growand will approach the 75% level in summer of 2009. Some may find the giveaways from Club Live compellingenough to switch search engines, but we believe that most of these searches are entered in order to win prizes.This makes the quality of the searches low and the probability of click fraud substantially higher than that of itscompetitors.

Yahoo has seen its market share decrease over the last year despite having more users come to its homepage andnetwork of sites. Only recently has the absolute number of searches increased although it still lags Googlesignificantly. The overall search query universe is growing at a strong rate, but the majority of the growth in isstill coming from Google.

Seasonality

Monthly U.S. Core Search Share, October 2007 October 2008Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08

Google 58.4% 58.6% 58.4% 58.5% 59.2% 59.8% 61.6% 61.8% 61.5% 61.9% 63.3% 62.9% 63.1%Yahoo 22.8% 22.4% 22.9% 22.2% 21.6% 21.3% 20.4% 20.6% 20.9% 20.5% 19.7% 20.2% 20.5%AOL 4.2% 4.5% 4.6% 4.9% 4.9% 4.8% 4.6% 4.5% 4.1% 4.2% 4.3% 4.1% 4.7%MSFT 9.8% 9.8% 9.8% 9.8% 9.6% 9.4% 9.1% 8.5% 9.2% 8.9% 8.4% 8.5% 8.5%ASK 4.7% 4.6% 4.3% 4.5% 4.6% 4.7% 4.3% 4.5% 4.3% 4.5% 4.3% 4.3% 4.2%

Y/Y U.S. Query Growth Rates, October 2007 October 2008Universe 26.0% 19.5% 15.4% 23.3% 14.8% 18.4% 18.8% 17.3% 18.9% 18.8% 19.0% 25.5% 20.1%Google 50.4% 39.6% 30.4% 36.9% 26.4% 29.7% 30.4% 28.4% 33.1% 33.2% 33.4% 38.6% 29.6%Yahoo 0.4% -5.6% -3.8% 1.7% -5.1% -1.8% -1.5% -2.0% 4.7% 3.4% 0.4% 7.1% 7.7%AOL -13.9% -6.1% -5.0% 12.5% 8.0% 13.5% 1.5% 11.0% 7.1% 14.3% 14.3% 18.9% 6.7%MSFT 12.7% 10.0% 7.9% 15.8% 9.4% 9.4% 14.2% 5.2% -10.6% -13.9% -11.6% 3.0% 4.2%ASK 12.9% 10.3% 4.7% 20.1% 12.6% 23.2% 15.4% 16.3% 11.8% 15.0% 15.7% 15.1% 7.9%Source: comScore qSearch

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Search Volume Growth Y/ Y

Universe

Yahoo

7


Source: comScore qSearch

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There is an issue of seasonality that affects internet usage and internet companies. The general consensus is thatusage slows during the summer months as the weather draws more people to outdoor activities. The later part of the third quarter is buoyed by back to school when traffic increases from academic sources. The fourth quarter istraditionally the strongest quarter as the combination of the educational segment and the searches that arise fromthe holiday shopping and travel season increase traffic.

Microsoft Ac quisition and Recent Events

Microsoft initially offered $31 per share or $46B for Yahoo but management rejected it stating it was inadequate.Microsoft walked away after a sweetened deal in private negotiations was turned down, causing the stock tocrumble. They exposed the Yahoo! / Google deal as being one that would not help competition and effectivelykilled it with lobbing. Shortly after the demise of the Google deal, Yahoo! CEO Jerry Yang announced that thebest thing for the company would be a sale to Microsoft, which spurned the informal offer. This inspired moreshareholders to head for the exit door and was also a likely catalyst for the resignation of Jerry Yang on November18, 2008.

With one of the biggest barriers to an acquisition removed, Microsoft took a fresh look at the acquisition. Onceagain, Microsoft publically stated that it was no longer interested in an acquisition, but a search deal was apossibility. We believe that the acquisition of Yahoo! by Microsoft still makes sense for both companies, but withthe lack of leadership at Yahoo! and talent drain that has been exacerbated by job cuts and under-water options, theprice of the deal is probably much lower than what media reports have been suggesting.

We have seen numerous reports surrounding the acquisition of Yahoo! for roughly $20 per share, or roughly $28B.We believe that the intent of the board of directors will be known when the new CEO is announced. Severalpotential candidates have been discussed in the press and some are more likely to affect a sale than others. Inparticular, Kevin Johnson would signal a sale more than other candidates due to the fact he ran the online divisionof Microsoft.

A search partnership similar to the one with Google that was scuttled was floated almost immediately followingthe informal Yahoo! proposal to Microsoft. Microsoft initiated the process but several weeks went by with noresponse from Yahoo!. We do not believe the current management is interested in a search deal with Microsoft asit may highlight areas of weakness in their search product and further hamper the possibility of an acquisition.

Layoffs and Change of Control Adjus tment

On December 10, 2008 Yahoo! initiated a workforce reduction that would eliminate 10% of the workforce and cost$400M. The reduction came as result of a comprehensive study by Bain & Company and was aimed at improvingthe financial performance of the company. The severance agreement provide approximately 4 months of severanceand may serve to insure there will not be an acquisition until at least mid February. Despite recent modifications tothe Change of Control poison pill that will make it easier for a purchase to be negotiated, we believe that theseverance agreements will keep potential suitors at bay until they have run their course. The modifications to thepoison pill can be found in an 8-K filed on 12/10/08.

Management DiscussionInvestors who place a premium on management have likely stayed far away from Yahoo! over the past year. Therecent resignation of Jerry Yang brings opportunity to Yahoo! and its shareholders. We believe that there are twotypes of candidates for the position of CEO at Yahoo!, one would be the leader that would clean the company upprep it for a sale. The other candidate would be the type of leader that has proven turnaround skills and can inspirethe employees to look past the layoffs and slumping stock price.

At this point, a deep discussion of management at Yahoo! carries little value as the inevitable changes at the top

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will set the tone for the company going forward. We believe that an outside hire means that president Sue Deckerwill be among the first to follow Jerry Yang out the door.

Click Fraud

Click fraud is a process of setting up content (possibly a blog or some other site) and then selling ad space on the

site. The clicks generated on the site will rarely produce a targeted lead for the advertiser and are often actuated bybots. Reports state the number of fraudulent clicks could be as high as 17% of all clicks. The actual number islikely to be a bit less than that, as it was on the high end of the range that we uncovered. Over the last fewquarters, Click Forensics has noted that click fraud has been moving lower, but still in the 16% range.

The fraud part of the equation comes into play when an advertiser sees that they are paying for many more clicksthan normal and those clicks are conversely not translating into sales. Yahoo has stated that they take the problemvery seriously and do investigate all claims that any clicks are fraudulent. Yahoo! has also offered and paidrefunds to advertisers that feel that they have been victims of click fraud.

A comparison of lawsuits concerning click fraud that both Google and Yahoo! recently settled, shows that theYahoo! settlement amount was much less than that of their major competitor. By not billing advertisers up fronton clicks, Yahoo! believes that they have as strong of a filtering system as any available in the market.

We note that click fraud is an industry wide problem, and not unique to Yahoo!. It may also be completelydestroyed if the potential model shift to cost per action gains traction. But much the same way spam evolved intophishing and phishing evolved into click fraud, there will always be a less scrupulous means of defraudingadvertisers and the public alike.

Risks

We believe that there are some inherent risks that all technology companies face and they include, but are notlimited to, the loss of high caliber human capital and inability to adapt to changes in the business environment.

Yahoo! also faces other significant risks like increasing competition. Microsoft and Google are their maincompetitors and they are both well funded and have high quality management teams.

A risk that investors should be aware of is that should the companys search tool begin to lose relevanceor not deliver high quality results, consumers and advertisers would probably use another search engine.This would have an adverse affect on revenue and earnings.

One risk that we see is the possibility that in a few more quarters or possibly years, advertisers in generalwill begin to take issue with the amount of revenue that is generated by search engines. This mightinstigate a potential shift in the business model or possibly an allegiance among advertisers as they try tolimit the amount that search engines make.

The age of the stealth Internet play has mostly come and gone, but in the event that another companybuilds a better, faster and bigger mouse trap (search product) consumers could change their searchbehavior patterns and not use Yahoo! as much.

Finally, the Company has stated that it expects its growth rate to slow and its margins to possibly shrink. This canbe construed as just boilerplate risks added to a 10K or 10Q, but the main idea is that the company cannot continueto post high double digit revenue growth. Many will point to the law of large numbers or the idea that thecompany has reached a plateau on the new consumer front. We would agree with both of these ideas.

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Valuation

Yahoo! posses some challenges when it comes to a standard valuation. A sum of the part valuation implies a break up that isnt as easy or as clean as it may sound. The overlapping parts of each segment make a break up lessattractive to all business lines except search, which in turn, benefits from the traffic of the other segments.

The near term outlook for the advertising market is poor, although there is still growth in its core franchise of search. That growth, however, is small and subject to overall market share decreases. Its display business is likelyto show little if any growth throughout 2009 and a potential sale of this division would likely go for less than amultiple of sales. The affiliate sites are in an even worse position. Most affiliates are leaving Yahoo! looking forhigher returns from direct internal sales or third party platforms (Google, Federated Media and numerous nicheplayers). We expect these revenues to continue to decline throughout 2009. Listings continues to be a mostlyseasonal business and while we expect a sequential increase for 4Q08, it will likely be a decrease on a year overyear basis. The Fees business, revenues generated mostly from consumers, is bolstered by Fantasy Football in 3Qand 4Q tends to lose momentum in 1Q and 2Q as premium services that used to generate sales are seeing increasedcompetition from free sites.

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Source: Company Reports, Sturdivant Research

0

100

200

300

400

500

600

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 E 1Q09 E2Q09 E 3Q09 E4Q09 E

Yahoo! Search Revenue

Growth deceleartionmodeledin to 2Q09and 3Q09 due to weak advertising market

and seasonality

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When looking to Google to help derive a valuation for Yahoo! we see that the difference between the two issignificant. We believe that Yahoo! deserves only a fraction of the premium that Google commands due toGoogles consistent growth. For comparison purposes, Yahoo! competitors (except for Google and Microsoft) areprivate companies that are laser focused in their specific niches.

In the search business, Yahoo! competes against AOL, Ask.com, Microsoft and Google among others. There arenumerous other search engines available, but those are the big 5 right now. Its been common knowledge thatTimeWarner has been looking for a bidder for AOL for some time, but a previous investment by Google has madea sale more difficult. Ask.com, a division of IAC Interactive has seen little in the way of growth since outsourcingorganic searches to Google. Microsoft and its Club Live search have moved to giveaways to increase traffic.Google continues to dominate the group with a product that improves with every use.

In terms of multiples, we have seen a significant contraction in the multiple for Yahoo! as concerns over the healthof the online world have sent many investors to the exit. Over the last two years Yahoo!s P/E multiple has shrunk from 65x to 18x and its multiple of forward earnings has exhibited a similar move from a high of 70x to its current27x. This contraction includes the recent outlook for internet advertising and should also include a slight M&Apremium. We believe that Yahoo! should revert to its low 20x forward earnings estimates. This equates to a share

price of about $8.50.The off-balance sheet items must also be included in any discussion of Yahoo!s valuation. The company owns34% of Yahoo Japan (Ticker 4689) and assuming the shares are sold and taxes paid, we value this holding at $5B.The company also holds 40% of Alibaba China, which would generate and after tax value of $2.5B. Finally wewould add in the investment in G-Market (Korea), would generate about $70M. Added together the off-balancesheet assets could produce as much as $7.5B. These estimates do include an assumption of a single or group buyeracquiring the entire position at one time.

We still believe there is a need to include a M&A premium to the stock despite the recent rejection by Microsoft.

0

1000

2000

3000

4000

5000

6000

1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08E

1Q09E

2Q09E

3Q09E

4Q09E

R e v e n u e s

Google Owned vs Yahoo! Owned

Yahoo! O&O Total

Google Owned Sites

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Source: Company Reports, Sturdivant Research

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Informal offers aside, we believe that the future for Yahoo! as an independent entity is limited. The synergies thatcould arise from such a deal would benefit Microsoft and Yahoo! shareholders. We believe that Microsoft willrevisit a purchase of Yahoo!, but will not do so until the advertising environment begin to show signs of improvement. This could take a few quarters, but as a significant participant in the market Microsoft will likelyhave some outstanding timing.

When we sum the core business and the off-balance sheet assets, we come to a market capitalization of around$19.5B. Adding in a small, but reasonable M&A premium could take the value to $22.5B. This would equate to$16 per share or a 37x forward earnings multiple, a number that we believe is too high. This could be viewed as anupside cap in the event of an acquisition.

With that limited upside, it is hard to suggest investors should build any position in the stock given the currenteconomic conditions. Therefore, we believe a market perform rating is an appropriate recommendation givencurrent economic conditions. This rating could change in the event of a buyout offer from Microsoft (or othersuitor) or should a new CEO come on board with the ability to affect significant change within the company.

We are setting a target price of $12, which equates to a 28x forward multiple. Should the CEO search continue forseveral more weeks or even a month, we would not be surprised if the stock retreats to single digits.

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Beth Ann Loewy, [email protected]

856-751-1331 ext. 114Food

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Fundamental Research

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Industrials

Chairman

Brian [email protected]

312-345-1534Technology

Sturdivant & Co.sBusinessmans Approach to Value Philosophy

Sturdivant & Co. uses the businessmans approach to evaluating stocks. This philosophy is predicated on looking at acompany as a prudent man would were he to consider making a reasoned investment in a business. We focus on a

companys strategy, the competitive position a company has versus its peers, quality of management, risk factors, itsprospect for growth, as well as critical catalysts and milestones as evidence of progress. Finally, of course, we look at acompanys valuation to determine where we feel the stock is priced attractively.


8/9/2019 YHOO 12.16.08

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Member: FINRA and SIPC

This material is for your private information and we are not soliciting anyaction based upon it. This report should not be construed as, or the solicitationof an offer to buy any security in any jurisdiction where such an offer orsolicitation would be illegal. The material is based upon information that weconsider reliable, but we do not represent that it is accurate or complete, and itshould not be relied upon as such. Opinions expressed are our current opinionsas of the date appearing on this material only. While we endeavor to update ona reasonable basis the information discussed in this material, there may beregulatory, compliance or other reasons that prevent us from doing so. We and

our affiliates, officers, directors, partners and employees, including personsinvolved in the preparation or issuance of this material, from time to time, havelong or short positions in, and buy or sell, the securities, or derivatives(including options) thereof, of companies mentioned herein. Sturdivant & Co.has not received compensation from this company in the past 12 months andthis company is not an investment banking client.

Date Price Rating Target

10/17/08 $353.02 Marketperform $550.00

Total Internet Group

Outperform Marketperform Underperform

33% 33% 33%

Outperform Marketperform Underperform

0% 0% 0%

Investment Banking Relationship

YHOO 12.16.08

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