The big tech story remains the Microsoft offer to buy Yahoo, and on Wednesday a meeting at the Yahoo’s HQ in Sunnyvale, CA may seal the deal, though it’s more likely that negotiations will continue for some time after that meeting.
Microsoft may be wondering about the wisdom of the aquisition given how hard the market appears to have punished them for the offer. Although other tech stocks were down last week, Microsoft’s 13% drop amounted to a loss in capitalization equal to almost the entire value of the Yahoo deal. ie you could argue that even if Yahoo sold themselves to Microsoft for $1 on Wednesday, the boost in the merged company value would not make the two any more valuable than *Microsoft along* was worth before all this began. That’s a lot of financial simplification but Microsoft must have at least somewhat more skepticism about all this than they did as they made this offer.
So, what are the likely strategies here? It is clear Yahoo will reject the current Microsoft Offer which amounts to about $30 per share, and they are strongly rumored to be asking Microsoft for $40 per share. I’ll eat my keyboard if Microsoft agrees to $40, but I do think they may immediately counter offer at about $34 per share. Of course unless the inclinations of the Yahoo board change they’ll reject this as well. I’m growing somewhat suspicous that the unreasonable $40 amount is not really an attempt to boost the sales price – it may be the best way for the Yahoo board to send negative signals, try to wait things out, and give Microsoft more chances to back out. If Microsoft gets cold feet from the share price drops or Yahoo’s chilly reception of the merger idea, and then backs out of the deal, shareholder lawsuits against the Yahoo board are less likely and weaker. The Yahoo board will simply say the $40 was a negotiating tactic that went wrong rather than a tactic to kill a good deal.
However I don’t think Microsoft is going to go softly into the night on this, and that will make all this very interesting. They’ll offer more, and at even $34 per share Yahoo would be getting an amount approaching a 100% premium over their recent 52 week low of about $18 per share. This is the price YHOO traded at following the bad guidance from the recent earnings call.
It strains the credulity of this shareholder to see how the Yahoo board can argue that Yahoo has a realistic shot at being “twice as valuable” as they were last week in a reasonable time frame. In short, we all know they can’t. This may be a defect of market forces or employee attrition or lazy management or low morale or Google defections or whatever, but left to her own devices Yahoo is pretty much going nowhere fast. I’ve been bullish on Yahoo for several years now and remain convinced that the company can eventually turn things around. However I think this aquisition may be 1) part of that turnaround process and 2) presents an offer far too good to refuse without risking a share price meltdown.
So, looks to me that on Wednesday the Yahoo board will turn down the current offer, Microsoft will up the offer to about $34, and Yahoo board will turn that down too (probably the following week). This will lead to nothing short of a Yahoo shareholder revolt as anxious investors watch a company throw away tens of billions of birds in the hand arguing they are seeking a few more birds in the internet bush.
Ha – even Mini Microsoft hates the deal. An interesting salary debate over there along with the normal absurd whining from developers over their already very large salaries.
Disclosure: Long on Yahoo (but not for long!?)