????The carefree days of Yahoo -- when the web pioneer's name was more of an exuberant cry rather than a sarcastic remark -- are behind it. For several years, the company has struggled to right itself in the face of tough competition from Google and Facebook. If Yahoo was going to return to the forefront of web innovation, it probably would have happened by now.
????What are its options? Here they are, in a not-so-pleasant nutshell. Yahoo (YHOO) can remain an independent public company, staying on its agonizing path of turning itself around. It can sell part or all of itself to private equity firms. Or it can merge with other firms in similar straits, hoping that economies of scale fix things.
????None of these options is very appealing. But one of them is significantly less unappealing than the others: If Yahoo were to merge with Microsoft (MSFT) and AOL (AOL), two companies it recently forged an online-ad alliance with, Yahoo has a decent shot at a steadily profitable if not exactly glamorous future -- one that could still satisfy both users and shareholders.
????Such a tie-up could be the least bad of the three options. The first two options are likely to lead to unhappy outcomes for Yahoo. Yahoo has tried to turn itself around for years, with results that could be described at best as treading water. Over the past five years, revenue has declined steadily while net income has flatlined. The stock itself has vacillated around the $15 mark for the last three years. A lot of the value is tied up in Asian assets that few Americans know anything about.
????So although Yahoo would prefer to remain an independent public company, it would mean battling increasingly disenchanted shareholders in the face of ever-tougher competition. Google (GOOG) is gaining ground in display ads, leaving Yahoo a smaller piece of the pie it once dominated. Meanwhile, social media ads -- a perennial weak spot for Yahoo -- is eating up a bigger piece of total online-ad spending.
????So Yahoo is likely to be bought out, either by private equity firms or another tech company. Most reports point to private equity firms as the more likely buyers. KKR (KKR), Blackstone (BX), Silver Lake and others are reportedly kicking Yahoo's tires with an eye to buying part or all of the company.
????Although this seems like the most likely scenario for Yahoo right now, it wouldn't be easy. Yahoo's $19.5 billion market cap is large by the standards of most leveraged-buyout candidates. Its structure is complicated by its relationships with Yahoo Japan and Alibaba. A private bid could incite hostile buyers into action. If the private bidders try to buy Yahoo with a PIPE, a controversial move usually reserved for the most desperate companies, it could dilute current shareholders.
