After Yahoo! removed the deadline for MSFT to appoint directors, it looks like MSFT is mulling making the bid all-cash.
This begs the question: should YHOO investors cash out now and get out of the stock?
Microsoft has been a major backer of Mojo Supreme, indirectly at least.
Last year, I was on the verge of unloading my position in the best positioned stock in all of online advertising (aQuantive) when literally the next day, I woke up and realized that AQNT was up $30/share and my holdings had shot up considerably: MSFT had agreed to acquire AQNT at an 85% premium for a cool $6B, or $66.50/share. The previous day, AQNT was trading at about $36/share.
In many ways, the same can be said about YHOO: overnight YHOO was up $8/share. Of course, YHOO is actually down from both its 52-week high (which it hit in November 2007) as well as its 5-year high of $41, which it hit in January 2006.
When YHOO bombed on January 29th, 2008, I said that lawyers (of either a corporation or private equity investors) were drafting the papers for a takeover bid. Four days later, MSFT unleashed a $44.6B unsolicited offer.
Judging Jerry Yang Since the Unsolicited Bid
For the past month, Yahoo! CEO Jerry Yang has ignored shareholders.
If Yang and his team would have spent as much time trying to grow their business as they have trying to escape from MSFT, maybe Yahoo! would not have found itself in the situation it’s in today.
The situation it’s in today is simple: MSFT has cornered YHOO, and while some maintain that MSFT’s offer has been reduced due to MSFT’s falling stock price, the fact remains: YHOO has to accept a $31/share offer, from a combination of stock and cash, for the deal to go through.
A month has gone by and YHOO is trying every trick in the book to try to stay one step ahead of MSFT, but in doing so, it is finding itself in a corner (for the craziest way, here’s our hail marry strategy).
Merger Arbitrage: Tracking the Spread
YHOO’s stock was trading for $18/share before MSFT’s offer. Today it crept up $0.61 to $28.67. That is $2.33 away from the purchase offer. At one point in the last month, YHOO got awfully close to the purchase offer. Paul Kedrosky is keeping tabs on the spread (merger arbitrageurs must be having a blast).
Systematic Meltdown
This, of course, is all happening against a backdrop of melting market cap and falling stock prices. The company suffering the biggest reality check is none other than Google, the company responsible for Yahoo!’s fall from grace (after Yahoo! itself of course, since Yahoo! only has itself to blame).
It should be noted that the recent selloff is not immune to Google, consider the following year-to-date performance, captured by Barron’s:
- Apple is down $77.82, or 39.3%. Market cap lost: $68.4 Billion
- Google is down $235.87, or 34.1%. Market cap lost: $73.9 billion
- Amazon is down $30.63, or 33.1%. Market cap lost: $12.8 billion.
- Research In Motion is down 13.83, or 12.2%. Market cap lost: $7.8 billion.
A Bad Omen: Insider Selling
What exasperates Google’s situation is the sheer volume of insider selling: $10.1B of shares have been sold by insiders, with very little buying. At a market cap of $200B last November, clearly a lot of insiders did not believe the stock had much upside… but the fact that this has been ongoing and relentless suggests something deeper.
Underwater Options Has Never Helped Recruitment, or Retention
Even worse than the share slide and the insider selling has been the departure of a key executive, Cheryl Sandberg, to become COO of Facebook. In fact, yesterday, Google shares slid as much as 4.6%, trading below a 52-week low for the first time since its IPO and removing a technical crutch that had supported the stock.
Systematic Risk: Beta
Google has always been a volatile stock. In the stock market, volatility is measured by beta. Beta is synonymous with market or systematic risk.
Beta is calculated using regression analysis, and you can think of beta as the tendency of a security’s returns to respond to swings in the market. A beta of 1 indicates that the security’s price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security’s price will be more volatile than the market. For example, if a stock’s beta is 1.2, it’s theoretically 20% more volatile than the market.
Many utilities stocks have a beta of less than 1. Conversely, most high-tech Nasdaq-based stocks have a beta of greater than 1, offering the possibility of a higher rate of return, but also posing more risk.
The Benchmark Index: Nasdaq
Of course, it’s important to note what the benchmark index is: in the case of utilities or more mature companies, the index would be the NYSE or the S&P. In the case of Google, it’s Nasdaq. Nasdaq is the index for Yahoo!, too.
According to Yahoo! Finance: Google has a beta of 2 while Yahoo!’s beta is only 0.45. So since a Beta of 1 would mimic the market’s movements, then for purposes of illustration:
- Say the Nasdaq goes up by 10%, Google would go up by 20% whereas Yahoo! would only go up by 4.5%.
- However, in a downturn, if the Nasdaq falls by 10%, then Google would be down 20%… whereas Yahoo! would fall by only 4.5%.
Relying on beta alone implies that since the new year, Google would have fallen more than Yahoo! However, technical analysis suggests the opposite. Look at the following graph:
Clearly, until the MSFT offer which causes that massive spike in YHOO’s shares, YHOO was far outperforming Google. If we were to use technical analysis and continue to chart the blue line without a MSFT bid, then you can project that YHOO would have been 40-50% lower than where it was since its 52-week high of $34.
Should Yahoo! investors sell their shares or hold on?
Google is actually down 40% off its 52-week high, YHOO is down only 16%, but that is obviously thanks to the MSFT bid.
We ran some numbers under three bad - dare I say worst case - scenarios:
Explanations?
- In the first line, we use YHOO’s stock price as of its 52-week high and benchmark it stock to Google (down 40%) to see where it would be if the MSFT would be a figment of YHOO shareholder’s imagination.
- In the second line, we use YHOO’s stock price as of the date of GOOG’s 52-week high and benchmark it stock to Google (down 40%) to see where it would be if the MSFT would be a figment of YHOO shareholder’s imagination. This case assumes that Google - and not YHOO - is the real barometer because as we outlined above, we’re in a systematic meltdown and not a unique one per se.
- In the third line, we overlook beta and look at technical analysis and see where a more aggressive 50% discount would lead YHOO to. Here, YHOO would not be 40% down, but 50% down. We’re not sure this would happen as we saw than anything below $20 gets would-be buyers out…
If you run through the 3 different scenarios, the stock could be anywhere from $15-20.
I personally see $20 as the new floor (though who would have figured that $450 would be Google’s new “floor” - is it?). Regardless of Google, YHOO has been in the doldrums and clearly others saw enough value and enough of a margin of safety to step in and launch a bid… but seeing how YHOO has rejected MSFT’s bid and acted recklessly (the $1-3B severage packages?), I am not sure if shareholders - let alone would-be buyers - would buy this stock.
Bottom Line: Has the Market Changed Enough to Make a Change in MSFT’s Decision (No).
I’ve held this stock for a while… and while I maintain that this deal would get done at $50B, I wonder if the massive falloff in Google’s stock (the market bellwhether) combined with YHOO’s impending Q1 mess could mean that MSFT could technically bid lower (Yang is already blaming MSFT for distracting YHOO… wonder what the excuse was for before the bid). I doubt this last scenario would happen (the lowered bid), of course, but the point is the upside and downside could either be very modest or considerable.
Yang: Hero or Goat?
If Yang had shown to be rationale and cool-headed, he could make a lot of money for shareholders. But right now, I see Yang as a very emotional and idealistic executive who is out of touch with reality.
As a shareholder, I try not to be emotional. When I have been emotional, I lost money. When I am objective, I make money. All right, so I am not sure that is always right… but it does sound like it’s true, or should be true.
So what’s the respective upside and downside?
As you can see, realistically, the stock won’t fall more to more than $20 (and I think it won’t go below $22-23) and I doubt this will go as high as $40 (though I’d love for that to happen); I see the upside being $35. So realistically, you have to decide: do you want to risk staying in the game for an additional 25% if the downside is 25%? That’s the question.
Of course, whether or not I make money on this has little to do with me, but it’s got everything to do with how Jerry Yang reacts.
There’s a time and place to be emotional, and a place and time to be rational.
As a sales executive, I used to count on emotions to seal a deal, but I always anchored my case on logic. When I left that position, I got sued by my former partners (they were real swell guys). They got their new parent to gang up on me, too.
But throughout the ordeal, despite being sometimes accused of being emotional and a hothead, I was remarkably cool. It got me through it. Had I lost my cool inside or outside the courtroom (and boardroom), I would have lost everything, including this company. But I did everything in a very methodical and calculating way.
Most importantly, while I could care less about my petty former partners, I knew I had to one day work with the new corporate parent… so I had to remain cordial and diplomatic with them. Today, our company partners with said parent.
To varying degrees, Yang seems to be showing a disregard for the people that will remain at YHOO when the inevitable takes place. Yang is actually being selfish and childish.
Of course, Yang is facing a different challenge, but the fact is: Yang has been a disaster and his mythical and legendary status in Silicon Valley means few will say that to him… and his chummy relationships with the media ensures that they don’t either. This is the biggest travesty of them all.
So Ash: will you put your money where your mouth is and sell?
Ultimately, I am leaning towards not selling my shares, yet… and if I do, it’s probably got more to do with the fact that I have progressively sold holdings in my stock portfolio to seed, fund and grow WatchMojo.com (all those videos cost money folks)…
So I guess the real question is, say (hypothetically of course) tomorrow I raised $1M, $5M or $10M for the company, would I really sell my shares?
That’s indeed a pretty good question. It’s getting late… and even I know when a post is getting way too long.
We’ll talk some more tomorrow.
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