Yesterday’s board meeting at Yahoo! seems to have concluded with Yahoo! decided to reject MSFT’s $31/share offer as it was deemed to drastically undervalue the company.
In all fairness, considering that Yahoo! was trading at $34/share in November 2007 and $40/share in January 2006, this should come as not surprise.
Also not surprisingly, we hope anyway, Yahoo! was only considering the outsource search to Google strategy as a whisper strategy because that would a) reinforce Google, b) weaken Yahoo! as a company and as a stock and c) unleash a massive negative shareholder reaction.
Fearing that MSFT might take the hostile route (so far, while the bid was unsolicited, it was not hostile), Yahoo! has adopted a poison pill.
As onlookers and shareholders, we actually think this reaction is the smartest one, for one, it shows that Yahoo! is willing to play nice, won’t be pushed over in selling for as low as $31/share, and would consider an offer that better reflected the company’s assets.
The WSJ reports (more in this CNET article) that Yahoo! will relay its position formally to Microsoft’s board on Monday. We doubt Yahoo! would explicitly say so, but rumors circulate that Yahoo! is seeking - and would consider - a $40/share offer.
Yahoo!’s float is 1.25B but it has 1.39B shares outstanding, this is what is causing different reports on what it takes to get a deal done,
- a $40/share offer x 1.39B shares implies a $56B deal,
- a $40/share offer x 1.25B shares projects a value of $50B.
To compare apples with apples, I think it will take a $50B deal. So:
- using the number of shares outstanding (1.39B), this is a $35.91 offer,
- using the float, that is $40/share.
This is why different sources are confusing the matter. To see the difference between shares outstanding and float, click here.
Incidentally, last week we argued that the “ultimate final` MSFT’s offer and accepted bid will come in at $50B”, see the post here.
While Yahoo!’s options remain limited, we believe that MSFT would gladly consider paying $5.4B more than it was initially willing to pay if it means avoiding the hostile route and showing goodwill.
It will be very interesting to see how the stock market would react. In some ways, it’s anyone’s guess. But we suspect YHOO will shoot past $31/share and nudge ever-so-closely to whatever price implies a $50B market cap…
Why do I think this will settle at $50B?
MSFT’s stock will actually stabilize because the market will be able to put a floor on how much the acquisition would cost MSFT, and as a result… if both sides play nice and remain diplomatic, you will see a slow upward progression in the weeks to come towards $40. Bear in mind, at the time of this post, we remain long YHOO.
Remember, even News Corp. ended paying $5.7B (14% more than its initial, supposedly too-good-to-pass $5B offer) for Dow Jones. Taking this bid from $44.6B to $50B is 12% more. While MSFT’s stock has fallen to $28 or so and its offer was for $31 in cash and shares, let’s be realistic: MSFT would have had to keep its price at $31 for Yahoo! to consider that… so if Yahoo! hints at $40/share, and MSFT agrees, a 12% increase is not unacceptable. We also argue that a combined entity would be a $400B company once the dust settles, so MSFT shareholders would welcome the deal if it can be done with as minimal uncertainty and is as little bit of time.
Most important in this process is time, and not money. MSFT has ample financial firepower to make a $5-10B additional payment. If it can walk away with Yahoo! at $50B then both Steve Ballmer and Jerry Yang can emerge victorious.
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