Wednesday, April 09, 2008

Revisiting Yahoo and Microsoft

We're getting ready to have another severe thunderstorm so I'm going to make this a quick post.

Yesterday's Wall Street Journal (WSJ) had a story titled "How Microsoft and Yahoo Could Come Together."

To recap, the WSJ said:

When extended on Jan. 31, Microsoft's cash-and-stock offer was valued at $31 a share, a 62% premium over the price at which Yahoo was trading. The value is lower now because of a subsequent decline in Microsoft's share price. Each dollar per share that Microsoft raises its offer would sweeten the deal by about $1.4 billion, and the software maker would have to pay more than $2 billion more just to get back to the value of its original bid.

This past Saturday I reported here, Microsoft's CEO Steve Ballmer sent a letter to Yahoo, giving them three weeks to respond and telling them that failure to do so might result in a hostile takeover.

Yahoo has repeatedly said that the Microsoft offer isn't good enough. Insiders believe Yahoo is hoping to get closer to $40/share rather than the $29.36/share at which the offer is currently valued. While an offer in the mid-thirties might be realistic, since Yahoo has not been able to turn up any viable alternatives, Microsoft seems uninclined to sweeten the pot.

. . . there's a rough consensus among analysts and investors that two other scenarios are more likely.

In the first, Microsoft would signal to Yahoo that it's prepared to raise its offer and the two would enter friendly negotiations. In the second scenario, Microsoft would decide to wait it out and prepare a hostile effort, hoping that Yahoo will come to the table in the meantime.

Meanwhile, yesterday's Los Angeles Times reported that Yahoo continues to seek help from Time Warner.

Yahoo and Time Warner declined to comment on the talks. Several analysts said they were skeptical that Yahoo could pull a rabbit out of its hat. "Yahoo is going to be sold to Microsoft," technology investment banker Ken Marlin said. "It's inevitable now."

The LA Times story pointed out that Microsoft would still prefer a friendly deal rather than a hostile takeover. A hostile takeover could be protracted, "delay the union and mean more losses of key Yahoo employees. A former Yahoo executive said Monday that employee retention had become a big problem."

A hostile takeover could also encourage Yahoo to seek relief from European antitrust regulatory bodies, which Microsoft would prefer to avoid.

Stay tuned . . .

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