BUSINESS BLOGS
BUSINESS BLOGS
category: business
08 May 2008

Is Yahoo! checkmate?

In one word: yes. And that is why MSFT is all of a sudden in no rush.

1- A company’s Board of Directors does not have to accept a buyout offer, but if it decides to sell, then it has to accept the highest bid. Remember that.

2- Technically, before the MSFT offer, YHOO had all of the options in the world, they included:

- merge with Microsoft
- merge with eBay
- merge with Viacom
- merge with CBS
- merge with FIM / sell to News Corp.
- sell to AT&T
- be taken private
- sell to Google buy Yahoo!
- status quo (a $100B market cap by 2010?)

But since MSFT launched its takeover bid, everything changed. In fact, everything crystallized when MSFT removed its bid.

I doubt any of those companies will actually undertake any time to hold talks or conduct due diligence frankly, because MSFT effectively has a right of first refusal. A ROFR gives a party the right but not the obligation to buy an asset at a given price at a given time. In this case, the given price is not set in stone per se, but determined by whatever the best offer will be.

However, by pre-emptively striking with a $31 offer - and letting it be known via the media that it would go to $33 - then no one else wants to bother to compete with MSFT.

Any company that wants to buy YHOO has to do so knowing that MSFT will go to $33, and maybe more… even PE firms cannot topple MSFT’s warchest. YHOO can remain independent but shareholders will press it to re-engage talks with MSFT. In this scenario, MSFT has in fact gotten itself the right, but not the obligation, to acquire YHOO. In derivatives parlance, this means that MSFT has a call option on YHOO.

Where this gets crazy is that a call option usually has a set strike price at a given date (or before, if it’s an American option vs. a European which has a precise date). But MSFT is not even obligated to pay $31. It can technically argue that the time value of money reduces YHOO’s value… and I believe this is why Bill Gates is arguing that YHOO is worth less with each passing day. I do not think they will push for a lower bid, but they will use this argument to ensure that YHOO feel like a $31 bid is an act of good faith.

Continuing with the derivatives / call option analogy, if MSFT holds the call option (the right to buy) and decides to exercise it, then YHOO must sell.

Did MSFT plan all of this? Who knows. But surely YHOO miscalculated everything and heads will, and should roll.

No wonder MSFT is in no hurry now.

Just wait for YHOO’s Q2 report… which will probably not surpass expectations because Jerry Yang mistakenly pumped up expectations to argue for an independent YHOO. And now, YHOO is anything but independent.

I own 5% of what I owned on Feb 1. I don’t regret not selling it all, I am just very happy I sold what I did…

Those who say Steve Ballmer’s job is on the line are crazy, they are erecting a monument in his honor in Redmond, and soon, YHOO HQ.

In the meantime, here’s a song YHOO CEO Jerry Yang might be singing over at YHOO HQ: