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
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