How High The Sky?

Earlier this year I wrote a fanciful column suggesting that Yahoo might buy CBS.

At the time, Yahoo was worth about $28 billion, CBS $24 billion, and CBS was “in play,” as the speculators say, meaning it was looking to be acquired. A few weeks later the value of Yahoo fell back for a time, and when CBS decided to merge with Viacom we forgot all about it.

Well, it seems CBS chairman Mel Karmazin should be listening to my unsolicited advice. He’s done OK this year. CBS is now worth $38 billion. Yahoo, meanwhile, is worth $91 billion. If you’re in the online business you may have forgotten what $91 billion means. Well, General Motors is currently worth $46 billion. GM had sales of $161 billion last year, and net income of nearly $3 billion. Yet Yahoo, with $203 million in sales and $25.6 million in net earnings in 1998, could buy GM twice over.

By now, I’m starting to sound like an old crank on this subject, even to myself. The value of anything has little relation to anything intrinsic – it’s what someone will pay for it right now. If you’ve watched your house rise in value, or checked out an art auction, you know that scarcity and location mean everything.

Yahoo has 263 million shares, but most of them don’t trade. Softbank holds 28 percent of Yahoo’s common shares, while co-founders David Filo and Jerry Yang hold 11 percent each, and Chairman Tim Koogle owns another hefty chunk. When you need Yahoo, in other words, you find there isn’t much around. And this week everyone needed Yahoo.

Because of its wild market success, Yahoo was added this week to the Standard & Poor’s 500. That means everyone whose mutual fund tracks the S&P (funds that track an index like this are called “index funds”) had to buy Yahoo. Because the S&P is weighted based on the value of stocks, index fund managers had to buy a bunch of Yahoo, and sell a little of everything else they had, to match the index.

But Yahoo isn’t going to have as easy a time of it next year. I was talking to a media executive for another publisher this week, and he said companies like CBS now view Yahoo as a direct competitor. They should – Yahoo is now worth more. The Walt Disney Co., for instance, has a market value of $56 billion. Time Warner is worth $82 billion.

My friend explained that media companies are built on properties, franchises that can be exploited across many businesses. Yahoo doesn’t produce TV shows, or movies, or any other programming. It just does Internet stuff. But now all these direct competitors also do Internet stuff, and realize that Internet stuff is worth real money. CBS is paying $5 billion over 10 years for the NCAA basketball tournament in large part for the Internet rights, rights that were previously considered a free good. Those days are over.

How high is the sky? Yahoo and the rest of us are about to find out.

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