While a rumor crept up that private equity firms were mulling making a counter-offer of their own for Yahoo!, the prevailing wisdom is that MSFT’s already given a disincentive for any bankers to even consider it. Not because $44.6B is out of the question, but because MSFT has the balance sheet, income statement and inside lane to get it done whereas PE bankers cannot in any way guarantee matching the deal, let alone beating it.
Of course, that does not mean that Yahoo! will accept the $44.6B offer. In fact, usually the next steps are for Yahoo! to ask for a higher price (I do not think that the Board can really offer any standalone strategy to create a similar upside in a short time frame).
After all, the $31 per share price is lower than what Yahoo!’s stock was trading at a mere 3 months ago and far lower than its $40/share peak of the past 5 years. I am not sure that we’ll see a $40/share offer, but once Jerry Yang and David Filo see the writing on the wall and realize that shareholders will storm the Yahoo! campus and scalp them alive, then they might ultimately “settle” for something in the $50B market cap range which is both what MSFT was rumored to bid for Yahoo! in May 2007.
Yahoo! Finance gave YHOO a float of 1.25B shares and 1.34B shares outstanding, but the $44.6B offer backs out to 1.438B shares at the $31 price… so I used that initially (and that gave me a per share price of $34.75 to hit $50B). That is wrong because while Yahoo! did recently hit that level, the market cap only stood at $40B.
Regardless, there is a risk that this deal won’t get done. Make sure you understand that as an investor or someone considering getting in at these levels, but with the deal looking more and more like a fait accompli, a final price tag in the $45-50B market cap seems plausible. After all, even Rupert Murdoch had to up the $5B offer to Dow Jones by ultimately shelling out $5.7B.
Note: I am long YHOO, this is not meant to be some form of investment advice, all securities pose considerable risk and buying YHOO now - or not selling it - remains highly speculative.
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WatchMojo NewsletterThe following example is somewhat tongue-in-cheek and meant to illustrate that perspective is everything. You’ve heard of the saying “there’s always a bull market, somewhere”? Well, there’s probably also a saying that goes something like this: “there’s always a buyer, somewhere” (or “a sucker is born every second”).
Anyway, after MSFT announced plans to acquire YHOO, venture capitalist Bill Burnham raised an interesting point:
Because by swallowing up Yahoo, Microsoft will be removing one of the biggest and most active acquirors of start-ups in Silicon Valley. The intense competition between Microsoft, Google, and Yahoo has arguably been one of the main factors helping drive up M&A activity and prices for internet related start-ups. It seems like every rumored acquisition over the past few years has had all three fighting in some way to win the deal.
Then NY-based VC Fred Wilson hinted that VC investing strategies will have to change:
I think we have to be mindful of the overall macro environment that we’re in… It will be less attractive to sell our companies, so we may choose not to do that, and we may choose to continue to finance them and grow them and develop them some more. It may mean that we finance our companies differently. We may finance them for longer periods of time, and take a more conservative approach to how we do the financing rounds. So I think we will have to adjust.
Microsoft has done more to help fund our company than any other entity I can think of, be it another company or an investment group. You see, I’ve funded our company’s operations myself… once in a while, Microsoft goes out and buys a company that I own shares of and the windfall adds a considerable amount of capital to my funds. Examples:
- Last year when Microsoft paid a massive premium to buy aQuantive, Microsoft tripled my investment.
- By offering a 62% premium on Yahoo!’s shares, once again Microsoft is helping fund WatchMojo.com and Mojo Supreme in general.
I don’t know what these VC types are talking about, I am all for Microsoft continuing this trend!
The point is, I think VCs are a bit bummed out that two of the usual suspects (MSFT and YHOO) that bail out their investments-with-no-business-model portfolio companies is about to become one, and as such, this will reduce competition for their exits and the prices thereof.
I think that’s nonsense. Other companies will step up: IAC, CNET, eBay, Amazon etc. just to name a few. And then there’s the old media companies like Viacom, CBS, News Corp., Walt Disney, NBC, NYT, Scripps, etc. who are getting more and more serious about new media.
In fact, this M&A will ensure many more deals to come. I’ve argued that we are in a maddening era of massive consolidation. This is one more manifestation. It might sound impossible, but many more will come over time (Apple/Google? Google/AOL? Google/IAC? eBay/Amazon? etc.)
Will this affect the landscape? Of course. But the landscape is all about one’s perspective, and as we said, VCs should chalk this up as the glass is half-full and not half-empty. In fact, to take this one step further, as MSFT and YHOO focus on integration and “keeping the pedal to the metal” I think they will be more likely to acquire because the “build from within” argument will be less powerful than if the two massive companies weren’t planning to integrate.
Tech Crunch is reporting that News Corp. is frantically trying to prepare a counter bid to MSFT’s $44.6B offer. Silicon Alley observes that Tech Crunch’s CEO Heather Harde is a former M&A executive at FOX. Does she have any inside insight? I too used to work at News Corp. (for a brief period) and let me say, hmm, I have no inside insight whatsoever… so I am quite comfortable speculating:
1- Will Rupert Murdoch really let Microsoft get stronger online after all of the hard work he’s done in the past 3 years to catapult FOX Interactive Media to become a web powerhouse?
2 - What about NBC Universal, which is owned by GE?
3 - It’s worth noting that News Corp. and GE’s NBC are partners in Hulu, which is backed by a $100M check from Providence Capital Partners.
I doubt that Providence would want to pony up more private equity money but it’s not impossible, since PR firms have so much money raised. According to a previous post I published:
- US private equity firms raised $215.4 billion in 2006, according to the Dow Jones Private Equity Analyst.
- Private equity investors, mainly pension funds, endowments, other institutional investors, have committed $555 billion, with $322 billion remaining to be invested, according to Wachovia Securities.
So, despite tightening credit markets, plenty-o-money has already been raised and lying dormant.
And then, given NBC and News Corp.’s existing relationship and partnership in Hulu, would GE and News Corp. consider going in half-half? Probably not. I think they would want to own it all, or at least 80%.
NBC - backed by GE - might consider making a run itself. Armed with a $363B market cap, $170B in annual revenues, $60B in cash, a whopping $514B in debt and thus an enterprise value of $816B, GE can do this deal. While News Corp. would need to bring in a private equity firm, GE is a private capital firm that happens to run operations in medical systems, lighting, aircraft engines, etc., by way of GE Capital being so immensely profitable and encompassing relative to its other units.
In fact, considering that GE’s stock has essentially been flat since 2001 when Jeffrey Immelt replaced Jack Welch, it’s not all that inconceivable for GE to consider acquiring Yahoo!, bundling it with NBC Universal and spinning off NBC Universal Yahoo!
Now that would merit the exclamation point!
Big media is getting more and more serious about new media and let’s face it, like I’ve been saying all along: Yahoo! remains the best positioned new media company in the world, were it not for their hapless and clueless upper management, Yahoo! would be the one running numbers and considering buying others… but I digress. The days of Yahoo! incompetence at the top are numbered. You can count on that.
Disclaimers: currently a Yahoo! shareholder; former News Corp. employee; existing business partner of News Corp. via WatchMojo.com’s content deal on MySpace TV. More to come - grin.
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