This morning, a reporter asked me why YHOO’s stock was flirting with $30 today and not edging higher despite its board’s suggestion that it would seek $40/share from MSFT. Of course, YHOO had refused officially today but the market was not convinced as to what MSFT would do.
“They’re no guarantee that MSFT will pursue YHOO if YHOO refuses” I figured.
Had MSFT be offended by YHOO’s rejection, they could have pulled the offer, which would have pushed the stock to the low to mid 20s. It would not have fallen below $20 because clearly there’s a floor price for what the stock market considers YHOO to be “too cheap” (and thus inducing a takeover bid).
Alas, with MSFT saying it won’t back down from its “full and fair” offer at $31, you can imagine that the stock market will drive YHOO’s stock price pretty close to $31… bear in mind while Dow Jones’ owners retained the right to refuse News Corp.’s bid, every soothsayer recognizes that MSFT will walk away with YHOO when the dust settles. With $31 being the floor price, YHOO will trade at $31 pretty soon.
Our bet - unlike many others - is that the time value of money and the uncertainty over the final price will cause enough of an overhand over MSFT’s stock which will lead Redmond to eventually counter with a final $35.91 price or $50B offer, which will come with a veiled hint at both a hostile attempt (to replace the Board) and a direct tender offer to shareholders.
The risk there will be a kyboshing of YHOO executives… which the market has already welcomed as a much needed change.
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WatchMojo NewsletterThis morning when I read that VentureBeat.com hired away a journalist from a traditional media organization, namely Dean Dean Takahashi from the Mercury News.
I briefly thought: “hmm… is this a Lou Dobbs quits CNN for Space.com?”
Then I figured: “nah… this is a reporter moving from one medium to another.” The fact that Venture Beat founder Matt Marshall was matching the reporter’s salary raised some eyebrows, for sure, but online ads are not where they were in 2000. In fact, IDC just reported that Q4 2007 online ads stood at $7.3B. That’s a lot of coin.
Anyway, the main reason why we’re not in the same mindset as before is simple: Venture Beat went out and raised money after bootstrapping operations. They remained in the black throughout… how much did they raise?
A whopping $320,000. That’s wise and a sign of good things to come: the company can always raise money in the future, and given the A-list backers list, they can if need be:
Investors include ex-Googlers Georges Harik and Aydin Senkut, Mike Brown (Foundation Capital), MHS Capital, Amidzad and the White Sand Group.
Nowadays, mistake #1 is raising too much money and not not enough.
Marshall must be reading enough nightmare stories on Venture Beat to have avoided such an outcome.
In the bubble days, we’d be reading that he raised $32M on a $68M pre-money valuation and spent $320,000 on a swanky party with a guest list that could not identify Marshall from a list of attendees or tell you what Venture Beat actually was.
MSFT responds, but the question is: who’s in control of the ball now? I’d say still MSFT.
Logic flows so easily:
- Online advertising in the US alone stood at $25.3B in 2007, with Q4 generating $7.3B
- Quoting Yahoo! CEO Jerry Yang, online advertising in the world is a $40B business, growing to $75B within 2 years, in 2010. Connecting these dots, the US garners $25.3B / $40B = 63.25% of that today, but should shrink over time.
- Today, if MSFT/YHOO merged, they would command according to IDC.
“If a merger between Microsoft’s new media business and Yahoo! would come to pass, the combined entity would have a net U.S. advertising market share of about 17% based on our 4Q07 data,” says Karsten Weide, program director for IDC’s Digital Marketplace: Media and Entertainment service. “It would not quite bring Microsoft-Yahoo! to where Google is in online advertising in the U. S., but it would give them a much better fighting chance than if they went it alone.”
- Using that very basic argument, if online advertising will become a $80B by 2010, and MSFT/YHOO had a modest 15% of the combined pie, MSFT’s annual revenues from online advertising in the world would be $12B.
Today, MSFT makes a pittance off its MSN.com/Live.com unit. But by comparison, other units make much more:
Admittedly, these are 2006 figures. 2007 revenue was $51B and 2008 is forecast to come in at $60B. But the point, when you get that big, you need home runs and grand slams, let alone doubles and triples, to keep investors happy.
From 2000 to 2006, MSFT’s share price was in the toilet (hey, just being honest). Bill Gates and Steve Ballmer maintained stuck to their game plan and did not really care about the short term mindset of investors. Eventually, the stock price nudged up from $20 to the high 30’s. Sure, it’s not a Google-esque ascent, but with 9.3B shares outstanding (compared to YHOO’s 1.3B and GOOG’s 312M), it adds plenty of value to the market cap.
The point is, today Microsoft responded to Yahoo!’s “thanks but no thanks” with a “oh really”. Make no mistake about it: MSFT’s go-at-it-alone strategy online are over. aQuantive was the appetizer, Yahoo! is the main meal… once that is down, they’ll wash it down with a tall glass of AOL.
Disclosure: long YHOO
The market is always right, goes the adage. In this case, then let’s consider what the market is saying:
Unlike our friends over at Alley Insider who took MSFT’s offer of paying $31 half in cash and half in stock literally, the market is realizing that the baseline for talks in any deal for YHOO involves an initial lobby of $44.6B for the company, or $31/share. The stakes have changed a bit, insofar that MSFT was willing to pay $43 back in the day (somewhat irrelevant) and $35/share as recently as January 28th or so, before Yahoo!’s stock tanked after announcing Q4 2007 results.
More importantly and not so surprisingly, as widely held securities, there is a considerable overlap in terms of shareholders who own both YHOO and MSFT. While the uncertainty over this deal is hurting MSFT in the short-term, it is helping YHOO. Long-term, all investors understand that acquiring YHOO would give MSFT as strong of a business in online advertising as it already commands in operating systems and productivity suites. As well, the fear of YHOO executives fleeing is obviously not seen as a risk. In fact, while few dare say it, the market is clearly suggesting that YHOO’s problem has been execution, and thus its leadership. As the deal edges closer and closer to reality, the market is suggesting that it has more confidence in MSFT’s management to create value with YHOO’s assets that it has had over the past 2 years in YHOO’s people’s ability to create value.
Today, after YHOO rejected MSFT’s initial offer of $31, the market sent YHOO up $0.80 to over $30/share and sent MSFT down $0.35 to $28.20.
Firstly, let’s hope once and for all this kills the argument that YHOO’s offer now sits at below $31/share because of what MSFT’s share price sits at today. That is the problem with analysts taking things literally. As an executive sitting across from Jerry Yang, trust me, the mere suggestion that your offer is now lesser than $31/share because of the market would be a deal killer. If you are MSFT and are this close to owning the best positioned new media company - at a time when online ads in the US in one quarter crossed $7.3B - you don’t even go there.
So what else is the market saying?
- MSFT will acquire YHOO.
- MSFT will probably not go hostile - yet - but it won’t hand over $40/share that easily.
- MSFT will make one more attempt at making this look friendly, by offering $35.91 a share, or roughly $50B for YHOO (as we have been saying all along). This time, the wording will be much stronger and more than insinuate that YHOO’s larger shareholders have already shown a desire to accept MSFT’s offer at $31/share ($44.6B) and MSFT expects any remaining shareholders to frolic at a $50B valuation.
- YHOO will accept the $50B and Jerry Yang will ride into the sunset, with the legend being that he was the CEO who doubled shareholders’ in the 100 days since he took office.
That’s what I think will happen. Will it? Maybe. Microsoft is being coy, repeating “all options are on the table”.
Bear in mind that this storyline has had many surprises starting off with MSFT launching an unsolicited bid that shocked and awed YHOO’s brass. The unthinkable would be for MSFT to unleash a $40/share bid for YHOO. By doing so, there would not be a single shareholder that would hesitate to accept this. This would also make accepting the deal very swiftly because YHOO has wisely or unwisely (time will tell) whispered through to the media that it won’t refuse a deal at that range. I’ve maintained that the uncertainty over MSFT’s deal is as much of a negative as the premium being paid for YHOO, after all, so long as YHOO and MSFT are dancing, it is not crazy for MSFT shareholders to worry that a white knight will emerge and MSFT will have to pay something obscene like $60B to win over YHOO. After all, when Doubleclick was first rumored to be in the running, the price tag was $1B. When it was settled, it was $3.1B. aQuantive rose to an even more jaw-dropping $6B price tag.
With Q4 2007 online ads coming in at $7.3B and YHOO so well positioned for display and video advertising, the desperation will only escalate… the sooner MSFT can wrap this up the better.
Note: Long YHOO
If you were wondering what all of the fuss over Yahoo! was about, IDC has some data to put it into context:
Companies continue to shift their advertising dollars to the Internet, as online ad spending grew nearly 28 percent to $7.3 billion in the fourth quarter of 2007, according to research firm International Data Corp. This caps off a year of ramped up spending for companies, with spending in 2007 up 27 percent to $25.5 billion.
This is shocking because Q3 2007 was the first quarter ever where online ad spend in the US surpassed $5B. So for it to grow to $7.3B in Q4 is very bullish.
PLAY
