Mid-Atlantic Institutional Research

Yahoo! (OTC: YHOO - $12.73)

Initiating Coverage: Weakness expected, waiting for CEO December 16, 2008

Brian Bolan
Long Term Rating: Market Perform (312) 345-1534
BBolan@sturdivant-co.com
Long Term Target Price: $12

Investment Summary: After a tumultuous year, Yahoo! is in search of new leadership to do one of Share Information
two things, clean up the company for a sale or point the ship in an entirely new direction. Either Price 12/16 $12.73
task is a difficult one considering the weak overall advertising market, continued loss of market 52 Wk Lo $30.25
share and the brain drain that occurred following the Microsoft offer and subsequent layoffs. We 52 Wk Hi $8.94
believe there is a M&A premium in the stock, but we estimate fair value of a take out to be about Avg. Volume 29.7M
$16. The stock is at multi-year lows but we still do not find the valuation compelling. We are initi- Insiders Own 15.9%
ating coverage of Yahoo! with a Market Perform rating and a one-year price target of $12. S&P 500 868.57

Key Points Financial Statistics

Equity Mkt. Cap. $17B
Near term weakness in overall advertising market hurts Yahoo!. Recent reports suggest Ent. Value $15B
that advertisers continue to decrease spending even more than what was reported only a
ROE 8.9%
month ago. This decrease in advertising dollars will likely hurt Yahoo! more than most of its
ROA 2.5%
competitors as its exposure to its affiliate network and display sites are not aided as much by
Bk Value /Share 8.36
the growth in search.
EPS
Market share continues to decrease. Third party metrics show Yahoo! losing share to its
EPS P/E
chief rival Google. Recent indications of traffic reductions across the entire Yahoo! network
suggest further weakness in both its search and display businesses. 2006A $0.51 46.3x
2007A $0.54 33.1x
Management has been the “Achilles Heal” for the company over the last year. The desire 2008E $0.38 23.7x
to remain independent prompted Yahoo! management to spurn an offer of $31 per share from 2009E $0.43 29.6x
Microsoft and attempt a search deal with Google. The company awaits a new CEO which
could signal a new direction for the company or a short term tune up for a sale. EBITDA
FCF/ EV/
Projected growth is well below that of the rest of the industry. We estimate net revenues EBITDA EBITDA
to be flat in 2009, something that growth investors would not want to see. We see little 2006A $1.4B 35.5x
growth coming from core segments as well as emerging products. We rate the stock a Market 2007A $1.3B 21.0x
Perform and have price target of $12, which represents a multiple of 28x our 2009 earnings
2008E $1.3B 18.8x
estimate.
2009E $1.3B 8.3x

Relative Daily Price 12/16/08

Source: BigCharts, Company

Reports and Sturdivant & Co. Estimates.

Important disclosures appear on the inside cover and back of this publication.
STURDIVANT & CO., INC.

STOCK PRICE PERFORMANCE

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

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

YHOO Daily 12/16/08

Source: BigCharts MP: Market Perform; T: Target

Mr. Bolan does not own shares of Google

Disclosures

Rating System Definitions

Sturdivant & 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 a
specific 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 to
“Hold”) ratings are reserved for stocks that we believe are in line with the market’s 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 in
absolute 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 perform
well relative to their sector but only for stocks that are expected to appreciate in actual dollar returns.
Research Analyst Compensation
Analyst compensation is based on: (1) the analyst’s productivity, including the quality of the analyst’s research and the analyst’s contribution to the growth and development of our
overall 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 our
investment banking business is not a factor in determining analyst compensation and compensation is not, directly or indirectly, related to the specific recommendations or views
expressed in the report.
Research Analyst Certification
The 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 the
subject 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 the
research 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 the
accuracy. 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 research
disclosures can be obtained from the Company.
Price Target Risks
Investment risks associated with the achievement of the price target include, but are not limited to, the company’s failure to achieve our earnings and revenue estimates, unforeseen
macroeconomic and/or industry events that adversely impact demand for the company’s products or services, product obsolescence, changes in investor sentiment regarding the
specific company or industry, intense and rapidly changing competitive pressures, the continuing development of industry standards, the company’s 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 company’s shares, refer to the most recent form 10-Q or 10-K
that the company has filed with the SEC.

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Table of Contents
Company Introduction 4

Key Products 4

Growing through Acquisition 4

Selected Acquisitions 4

Evolution of the Search Business Model 5

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

Market Share 6
Yahoo Market Share Graph 6
Monthly Market Share Table 7
Yahoo 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 10
Yahoo Search Revenue 10
Google 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 the
content based on a simple text search. This keyword search is the basis for how the search engine locates web
pages based on the words that a user types in. This is also the mechanism that has propelled billions of advertising
dollars to the internet in the form of banner ads, sponsored links and graphic splash pages among others. It wasn’t
until Yahoo! purchased Overture in 2003 that the company finally became a principal in the search business as it
sought 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 that
have been visited by more than 500 million people.

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

Growth through Acquisitions

Yahoo has grown over the years and has done so mostly via acquisition. Notable large acquisitions in the past
include Mark Cuban’s 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).

Selected Yahoo! Acquisitions

Target Date Announced Purchase Price Comment
Broadcast.com 4/1/1999 $4.65B Streaming media platform founded by Mark Cuban
Overture 7/14/2003 $1.37B Yahoo! becomes a principal in the search business
HotJ obs.com 12/12/2001 $436M A distant third in the job search market

Flickr 3/20/2005 <$50M Called "photo-blogging", ties in well with Del.icio.us

Del.icio.us 12/9/2005 <$30M Tagging sites of interest to share with social network
DialPad 6/14/2005 NA Allows for VoIP calls to be placed from Messanger

Right Media 4/29/2007 $680M Marketplace for Adverstisers, publishers and netwroks
Blue Lithium 9/4/2007 $300M Large Ad network with perfromance marketing attribtues

Source: Company Reports, Sturdivant Research

More recently, Yahoo! spent more on its advertising platform as opposed to growing the display network. The
acquisition of Right Media brought a competing model for internet advertising and Blue Lithium increased the Ad
Network that Yahoo! already had. These larger acquisitions were a departure from the build out of the display side
of the business that saw acquisitions like Rivals.com and BuzzTracker. The move away from content and towards
advertisers didn’t stop the traffic from coming to Yahoo!, but it hasn’t 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 as
acquisitive as it has been in the past. The combination of a weaker marketplace currency (low stock price), the cut

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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. While
this number is hard to track for mediums such as newspapers or billboards, it can be specifically tracked and placed
in high value areas (targeted) for the advertiser. The internet model then moved to a cost per click (CPC), where
the advertiser would only pay for each click on the advertisement as opposed to the paying for just a viewing of the
ad. This fostered the idea of a click through rate (CTR). For example, if an advertisement was run as a result of a
keyword 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. Google’s
release of “Checkout” (6/29/06) was touted as the foundation for a new shift in the advertising model. After being
subsidized in hopes to get more advertisers and consumers on the platform “Checkout” seems to have lost
momentum. 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 with
advertisers.

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 that
advertisers are quite familiar with and while the other models offer better tracking and ROI equations, the end
game is still the same. Management also pointed out that there was similar buzz surrounding a model known as
Click to Call, which enabled a VoIP based toll free line in a banner ad but has yet to overtake the traditional
models.

Industry Outlook

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

Taking the search engine beyond the search home page has been the goal of the major search companies over the
last several years. They have utilized the ability to quickly index a page, scan it for keywords and phrases and
deliver highly targeted ads that match the content of the specific page. This played out most dramatically in the
social 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 site
and 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 was
facing challenges in monetizing the traffic that MySpace was generating. Microsoft sensed weakness and moved
to attempt to level the playing field in the search space by making a $46B bid for Yahoo!. An arduous fight
ensued as Yahoo! determined to remain independent struck an accord with Google in an effort to escape
Microsoft’s bear hug. Yahoo! successfully thwarted the takeover attempt, however it continues to see its market
share decrease. Microsoft has abandoned its quest for Yahoo! (for now) and has moved to the Club Live search
which 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 will
continue, 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 the
way. What was a battle between BlackBerry and Palm has turned into a race with several competitors, the least of
which is Apple’s iPhone. The rich content of the web has shifted from the PC to the smartphone. The potential to
target consumers via tracking movement and purchases subsidized via advertising could significantly change how
commerce is enacted.

As new technology comes to market, we believe that consumers will embrace smartphones and their features. It
may 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 “clickstream”
of users from internet service providers (ISP). This raw data is analyzed to determine how many searches were
made in a specific time frame (generally one month) and where they were made. This data is not fully endorsed
by the search companies, but the trends are usually in agreement with the internal logs at the search companies.

24.0%

Yahoo Market Share

22.9%
23.0% 22.8%

22.4%
22.2%

22.0%
21.6%
21.3%

20.9%
21.0%
20.6%
20.5% 20.5%
20.4%
20.2%

20.0%
19.7%

19.0%

18.0%

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

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 Google’s market share of search will continue to grow
and will approach the 75% level in summer of 2009. Some may find the giveaways from Club Live compelling
enough 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 its
competitors.

Monthly U.S. Core Search Share, October 2007 – October 2008

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
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 2008

Universe 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

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

Search Volume Growth Y/ Y

30.0%

25.0%

20.0%

15.0% Universe
Yahoo
10.0%

5.0%

0.0%

-5.0%

-10.0%

Source: comScore qSearch

Seasonality

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There is an issue of seasonality that affects internet usage and internet companies. The general consensus is that
usage 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 is
traditionally the strongest quarter as the combination of the educational segment and the searches that arise from
the holiday shopping and travel season increase traffic.

Microsoft Acquisition 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 to
crumble. They exposed the Yahoo! / Google deal as being one that would not help competition and effectively
killed it with lobbing. Shortly after the demise of the Google deal, Yahoo! CEO Jerry Yang announced that the
best thing for the company would be a sale to Microsoft, which spurned the informal offer. This inspired more
shareholders to head for the exit door and was also a likely catalyst for the resignation of Jerry Yang on November
18, 2008.

With one of the biggest barriers to an acquisition removed, Microsoft took a fresh look at the acquisition. Once
again, Microsoft publically stated that it was no longer interested in an acquisition, but a search deal was a
possibility. We believe that the acquisition of Yahoo! by Microsoft still makes sense for both companies, but with
the lack of leadership at Yahoo! and talent drain that has been exacerbated by job cuts and under-water options, the
price 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. Several
potential candidates have been discussed in the press and some are more likely to affect a sale than others. In
particular, Kevin Johnson would signal a sale more than other candidates due to the fact he ran the online division
of Microsoft.

A search partnership similar to the one with Google that was scuttled was floated almost immediately following
the informal Yahoo! proposal to Microsoft. Microsoft initiated the process but several weeks went by with no
response from Yahoo!. We do not believe the current management is interested in a search deal with Microsoft as
it may highlight areas of weakness in their search product and further hamper the possibility of an acquisition.

Layoffs and Change of Control Adjustment

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 improving
the financial performance of the company. The severance agreement provide approximately 4 months of severance
and may serve to insure there will not be an acquisition until at least mid February. Despite recent modifications to
the “Change of Control” poison pill that will make it easier for a purchase to be negotiated, we believe that the
severance agreements will keep potential suitors at bay until they have run their course. The modifications to the
poison pill can be found in an 8-K filed on 12/10/08.

Management Discussion

Investors who place a premium on management have likely stayed far away from Yahoo! over the past year. The
recent resignation of Jerry Yang brings opportunity to Yahoo! and its shareholders. We believe that there are two
types of candidates for the position of CEO at Yahoo!, one would be the leader that would clean the company up
prep it for a sale. The other candidate would be the type of leader that has proven turnaround skills and can inspire
the 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 Decker
will 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 by
bots. Reports state the number of fraudulent clicks could be as high as 17% of all clicks. The actual number is
likely to be a bit less than that, as it was on the high end of the range that we uncovered. Over the last few
quarters, 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 clicks
than normal and those clicks are conversely not translating into sales. Yahoo has stated that they take the problem
very seriously and do investigate all claims that any clicks are fraudulent. Yahoo! has also offered and paid
refunds 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 the
Yahoo! settlement amount was much less than that of their major competitor. By not billing advertisers up front
on 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 completely
destroyed if the potential model shift to cost per action gains traction. But much the same way spam evolved into
phishing and phishing evolved into click fraud, there will always be a less scrupulous means of defrauding
advertisers and the public alike.

Risks

We believe that there are some inherent risks that all technology companies face and they include, but are not
limited 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 main
competitors and they are both well funded and have high quality management teams.

• A risk that investors should be aware of is that should the company’s search tool begin to lose relevance
or 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 general
will begin to take issue with the amount of revenue that is generated by search engines. This might
instigate a potential shift in the business model or possibly an allegiance among advertisers as they try to
limit the amount that search engines make.

• The age of the stealth Internet play has mostly come and gone, but in the event that another company
builds a better, faster and bigger mouse trap (search product) consumers could change their search
behavior 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 can
be construed as just boilerplate risks added to a 10K or 10Q, but the main idea is that the company cannot continue
to post high double digit revenue growth. Many will point to the law of large numbers or the idea that the
company 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 isn’t as easy or as clean as it may sound. The overlapping parts of each segment make a break up less
attractive 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 likely
to show little if any growth throughout 2009 and a potential sale of this division would likely go for less than a
multiple of sales. The affiliate sites are in an even worse position. Most affiliates are leaving Yahoo! looking for
higher returns from direct internal sales or third party platforms (Google, Federated Media and numerous niche
players). We expect these revenues to continue to decline throughout 2009. Listings continues to be a mostly
seasonal business and while we expect a sequential increase for 4Q08, it will likely be a decrease on a year over
year basis. The Fees business, revenues generated mostly from consumers, is bolstered by Fantasy Football in 3Q
and 4Q tends to lose momentum in 1Q and 2Q as premium services that used to generate sales are seeing increased
competition from free sites.

Yahoo! Search Revenue

600

500

400

Growth deceleartion modeled in to 2Q09

300
and 3Q09 due to weak advertising market
and seasonality
200

100

0
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 E 1Q09 E 2Q09 E 3Q09 E 4Q09 E

Source: Company Reports, Sturdivant Research

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When looking to Google to help derive a valuation for Yahoo! we see that the difference between the two is
significant. We believe that Yahoo! deserves only a fraction of the premium that Google commands due to
Google’s consistent growth. For comparison purposes, Yahoo! competitors (except for Google and Microsoft) are
private 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 are
numerous other search engines available, but those are the big 5 right now. Its been common knowledge that
TimeWarner has been looking for a bidder for AOL for some time, but a previous investment by Google has made
a sale more difficult. Ask.com, a division of IAC Interactive has seen little in the way of growth since outsourcing
organic 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.

Google Owned vs Yahoo! Owned

6000

5000

4000
Revenues

3000
Yahoo! O&O Total

2000 Google Owned Sites

1000

0
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09
E E E E E

Source: Company Reports, Sturdivant Research

In terms of multiples, we have seen a significant contraction in the multiple for Yahoo! as concerns over the health
of 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 current
27x. This contraction includes the recent outlook for internet advertising and should also include a slight M&A
premium. 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 owns
34% 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 we
would add in the investment in G-Market (Korea), would generate about $70M. Added together the off-balance
sheet assets could produce as much as $7.5B. These estimates do include an assumption of a single or group buyer
acquiring 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.

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Informal offers aside, we believe that the future for Yahoo! as an independent entity is limited. The synergies that
could arise from such a deal would benefit Microsoft and Yahoo! shareholders. We believe that Microsoft will
revisit 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 likely
have 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 an
upside 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 current
economic conditions. Therefore, we believe a market perform rating is an appropriate recommendation given
current economic conditions. This rating could change in the event of a buyout offer from Microsoft (or other
suitor) 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 for
several more weeks or even a month, we would not be surprised if the stock retreats to single digits.

12
 Yahoo!
Income Statement
($ in millions, except per
share) Q1 Q2 Q3 Q4 2007 Q1 Q2 Q3 Q4E 2008E Q1E Q2E Q3E Q4E 2009E
O & O Search 342.0 361.0 375.0 392.0 1,470.0 410.0 424.0 438.0 450.8 1,722.8 471.5 470.6 481.8 513.9 1,937.9
O & O Display 367.0 413.0 421.0 518.0 1,719.0 426.0 457.0 435.0 543.9 1,861.9 443.0 461.6 439.4 576.5 1,920.5
STURDIVANT & CO., INC.

Affiliate Sites 649.0 594.0 621.0 555.0 2,419.0 607.0 571.0 561.0 471.8 2,210.8 509.9 485.4 499.3 391.6 1,886.1
Listing Services and Other 110.0 119.0 126.0 125.0 480.0 130.0 135.0 130.0 128.8 523.8 146.9 139.1 132.6 133.9 552.5
Fees 203.2 211.9 223.9 242.0 881.0 245.2 211.1 223.7 235.0 915.0 240.0 220.0 230.0 245.0 935.0
Total Net Revenues 1,671.2 1,698.9 1,766.9 1,832.0 6969.0 1818.2 1798.1 1787.7 1830.2 7,234.2 1,811.3 1,776.6 1,783.0 1,860.9 7,231.9
TAC 488.8 454.2 484.9 428.9 1856.7 465.6 452.1 461.1 410.0 1,788.8 443.6 432.0 454.4 364.1 1,694.1
Other Costs 224.9 228.9 255.3 273.0 982.1 289.5 313.8 311.2 364.0 1,278.5 315.0 315.0 315.0 325.0 1,270.0
Total Cost of Revenues 713.6 683.0 740.2 701.9 2838.8 755.1 765.9 772.3 774.0 3,067.3 758.6 747.0 769.4 689.1 2,964.1
Gross Profit 958.0 1,015.0 1,026.7 1,130.1 4130.3 1063.1 1032.2 1015.4 1056.2 4,166.9 1,052.7 1,029.6 1,013.7 1,171.8 4,267.8

Operating Expenses
Sales and Marketing 367.4 390.4 410.9 441.6 1610.4 424.6 404.9 397.0 440.0 1,666.5 420.0 400.0 400.0 475.0 1,695.0
Product Development 239.5 281.1 274.7 289.0 1084.2 305.6 314.7 323.2 325.0 1,268.5 335.0 340.0 355.0 370.0 1,400.0
General and Administrative 155.2 133.3 161.5 183.5 633.4 171.1 188.8 199.6 205.0 764.5 200.0 196.0 197.0 209.0 802.0
Amortization of Intangibles 27.1 25.1 30.0 24.8 107.0 23.7 23.2 24.2 25.0 96.2 25.0 26.0 27.0 28.0 106.0
Workforce realignment 16.9 10.5 27.4 100.0 100.0 100.0 100.0 400.0
Stock Comp 140.0 128.8 145.5 158.1 572.4 125.0 123.2 132.6 135.0 515.8 125.0 120.0 120.0 130.0 495.0
Total Op Expenses 789.2 829.9 877.1 938.8 4007.4 941.9 931.7 944.0 995.0 4,338.8 1,080.0 962.0 979.0 1,082.0 4,498.0

Operating Income 168.8 185.1 149.6 191.3 122.8 121.2 100.6 71.5 61.2 354.4 (27.3) 67.6 34.7 89.8 164.8

Interest Income & Other 35.0 30.7 43.7 44.1 153.6 23.7 24.7 8.9 8.5 65.7 8.0 8.0 11.0 15.0 42.0

Pre-Tax Income 204.5 215.8 193.3 235.3 276.4 144.8 125.2 80.3 69.7 420.1 -19.3 75.6 45.7 104.8 206.8
Taxes 92.4 87.7 78.7 78.5 337.3 57.0 47.7 50.6 40.0 195.2 -7.3 27.7 16.7 38.3 75.4
45% 41% 41% 33% 39% 38% 63% 57% 38% 37% 37% 37%
Equity Earnings 29.0 32.1 36.5 52.9 150.5 454.8 54.9 27.8 23.5 561.0 17.0 18.0 19.0 20.0 74.0
Minoritiy Interest 1.2 0.5 (0.5) (4.0) (2.9) 0.1 -1.2 -1.9 -1.0 -4.0 -1.0 -1.0 -1.0 -1.0 -4.0

Net Income 142.3 160.7 150.7 205.8 86.8 542.7 131.3 55.6 52.2 781.8 4.0 65.0 47.0 85.4 201.4
Non GAAP Net Income 153.6 162.7 152.9 280.5 334.4 150.0 138.5 127.7 120.0 191.2 104.5 164.0 146.0 190.8 71.4
EPS $ 0.10 $ 0.11 $ 0.11 $ 0.15 $ 0.47 0.39 0.09 0.04 0.04 $ 0.56 $ 0.00 $ 0.05 $ 0.03 $ 0.06 $ 0.14
Normalized EPS $ 0.11 $ 0.12 $ 0.11 $ 0.20 $ 0.54 $ 0.11 $ 0.10 $ 0.09 $ 0.09 $ 0.38 $ 0.07 $ 0.12 $ 0.10 $ 0.13 $ 0.43
Fully-Diluted Shares 1418 1403 1395 1394 1,402.5 1395 1399 1397 1396 1,396.8 1400 1410 1410 1420 1410.0

Source: Company Reports, Sturdivant Research

13
STURDIVANT & CO., INC.

Sturdivant & Co.’s

Businessman’s Approach to Value Philosophy

Sturdivant & Co. uses the businessman’s approach to evaluating stocks. This philosophy is predicated on looking at a
company as a prudent man would were he to consider making a reasoned investment in a business. We focus on a
company’s strategy, the competitive position a company has versus its peers, quality of management, risk factors, its
prospect for growth, as well as critical catalysts and milestones as evidence of progress. Finally, of course, we look at a
company’s valuation to determine where we feel the stock is priced attractively.

Chairman

Albert A. Sturdivant
Asturdivant@sturdivant-co.com
856-751-1331 ext. 108

Fundamental Research

Richard A. Verdi Beth Ann Loewy, CFA Brian Bolan

Rverdi@sturdivant-co.com Bloewy@sturdivant-co.com Bbolan@sturdivant-co.com
856-751-1331 ext. 109 856-751-1331 ext. 114 312-345-1534
Industrials Food Technology
Consumer Staples
Retail

Institutional Sales

Carl R. Gibbs, Jr. Terry Williams

Cgibbs@sturdivant-co.com Twilliams@sturdivant-co.com
856-751-1331 ext. 107 856-751-1331 ext. 101

Institutional Trading

Harvey R. de Krafft Debra L. Bailey James Campanella

Hdekrafft@sturdivant-co.com Dbailey@sturdivant-co.com Jcampanella@sturdivant-co.com
800-486-1515 or 800-486-1515 or 800-486-1515 or
856-751-1331 ext. 112 856-751-1331 ext. 110 856-751-1331 ext. 115

14
 Date Price Rating Target
10/17/08 $353.02 Marketperform $550.00

Total Internet Group

Outperform Marketperform Underperform

33% 33% 33%

Investment Banking Relationship

Outperform Marketperform Underperform

0% 0% 0%

Member: FINRA and SIPC

This material is for your private information and we are not soliciting any
action based upon it. This report should not be construed as, or the solicitation
of an offer to buy any security in any jurisdiction where such an offer or
solicitation would be illegal. The material is based upon information that we
consider reliable, but we do not represent that it is accurate or complete, and it
should not be relied upon as such. Opinions expressed are our current opinions
as of the date appearing on this material only. While we endeavor to update on
a reasonable basis the information discussed in this material, there may be
regulatory, compliance or other reasons that prevent us from doing so. We and
our affiliates, officers, directors, partners and employees, including persons
involved in the preparation or issuance of this material, from time to time, have
long 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 and
this company is not an investment banking client.