Microsoft hostile bid for Yahoo!
2-4-08: The Microsoft (MSFT) and Yahoo (YHOO) potential merger is intriguing. The hostile bid by MSFT for $31 per share of YHOO represents 62% premium over last Thursday’s closing price. The deal is valued near $45 B
illion. This move by MSFT is hardly a surprise given there have been rumors of such a deal for over two years. After YHOO reported its disappointing 4th quarter results last Tuesday, Wall St. punished the stock, driving it below $20 per share (its lowest point in 4 years). All the while, MSFT was contemplating its next move.
Like a vulture eyeing its prey, MSFT decided to move in for the kill. Tired of trying to convince Yahoo management that they should merge, Steve Ballmer decided enough was enough. Forget the civility. A hostile bid was necessary to force Yahoo into a corner. Yahoo with its back against the wall must now respond with mounting pressure from investors. No more secrets, this game will now be played out in the public arena. What will happen next is anyone’s guess.
This move by Microsoft is brilliant in terms of timing. The fact the offer came during a time when Yahoo stock was at its worse makes the proposal look generous in the eyes of investors. At first glance, one would go wow! How can anyone argue a 62% premium is cheap? While the offer may appear generous, we believe the offer is inadequate for a company that still holds the top position in terms of visitors on the web. MSFT is essentially trying to low ball Yahoo at $31 per share. To Microsoft’s credit, they’re doing a great job of it.
Taking into account all of Yahoo’s holdings in such companies like Yahoo Japan, Alibaba, Gmarket, its successful properties, the fact they still hold the #1 traffic and about 20% of the search market, we believed Yahoo should be valued at $40 per share. If Microsoft really wants to buy Yahoo, they need to sweeten the offer now instead of trying to pull the wool over some of Yahoo’s desperate investors.
What should Yahoo do? There are not many good options for Yahoo at this point. Some suggest the company might just give up on search and outsource it to Google. Other says a leverage buyout is plausible. There are even reports companies like AT&T, Verizon or Comcast could make a bid. We believed that’s unlikely. Why would Yahoo want to sell to AT&T or Verizon? That would be foolish. The idea of outsourcing search to Google is also unlikely given this would further cripple the company. Some argue it would help the bottom line since Google is better at search monetization, but such move would only provide a temporary relief. The idea of a private equity buying the company is also unlikely given the current credit crunch. Only plausible conclusion is Yahoo will end up selling, but at a higher price, hopefully around $40 per share. From the sound of Microsoft’s tone, they seem to be preparing to do what it takes even if it means offering more.
Over the weekend, Google (GOOG) responded to the proposal, claiming innovation and competition could be hurt if Microsoft succeed. They must think the world is stupid or something. Google holds a virtual monopoly on search and now they’re whining about the deal? Give us a break! The truth of the matter is Google would love for this deal to go through so they will have one less competitor. While MSFT and YHOO is busy integrating, GOOG will continue to dominate. By the time the deal closes, who knows, Google could have 90% of the search market. At which point, it would be game over!
