Trying to make sense of the stock market is not an easy thing.
Today was probably the first day I was flat-out wrong: I said YHOO’s stock will nudge pretty darn close to $31, but in the end, it was down a few pennies. Why?
I still think that this MSFT/YHOO deal will close at $50B, up from the initial $44.6B offer. Last night, MSFT replied to YHOO’s “pass” with “full and fair”. But with the never-ending rumors (which we don’t buy) of other hookups and hail marry scenarios, I think MSFT itself wants to nip this in the bud, fast.
From my perspective, that set a floor price of $31. In other words, YHOO investors got a sense that yes, MSFT can up its bid to sweeten the offer, but it won’t go as high as $40/share. Maybe $36, probably $33 or more…
Today Legg Mason came out and said “up the bid a bit, Bill, and we have a deal”. Thus further cemented the belief by MSFT and YHOO shareholders that a deal will take place, and it will be somewhere between $31 to $36. What I think happened today is a lot of long time holders of YHOO threw in the towel and realized that the upside might be a few dollars per share, but it won’t be $10-11 (relative to the current $29).
Some major holders (be it institutional investors that are mutual funds or hedge funds) can still make a lot more money even if the stock goes up $1 to $5, since on a holding base of millions of shares this becomes sizable.
Some will ask: why should MSFT up the bid.
Technically, they don’t. But this is a game of chess. When you make a run for something, you want to make sure you have enough support. MSFT estimates that an offer of $31 will convince 20-39% of YHOO shareholders to sell their shares. I suspect MSFT has 5 or 10% of YHOO’s shares bought… so this puts them at about 25-49% of the shares needed.
To ensure that they have 30-60% of shareholders agree - plus their 5-10% holding - I think they recognize they need to sweeten the pot a bit. Sure, maybe not go to $40 / share, but in the mid 30s. Legg Mason - the second largest investor in YHOO - has all but agreed to sell in the mid 30s, and Capital Research & Management is eager to sell at current prices, so to ensure that YHOO indeed becomes a subsidiary of MSFT, I think the market is saying that this deal will settle at $35 or so, or $50B.
Long YHOO.
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February 12th, 2008 at 5:19 pm
I love your blog because of your excellent commentary on video, but lately every post is about Yahoo! As a reader, it’s probably not fair for me to complain, but I’d love to get back to regular programming, instead of seeing WatchMojo turn into a niche site devoted to covering all things Yahoo and Microsoft. Don’t get me wrong, I understand how important these two behemoths are too the future of online video, but after 20 Yahoo! posts in a row, it may be time to move onto some of the less publicized news that is out there.