Wrote this today... Please post opinions: Let me speculate. Microsoft's failure to acquire Yahoo put them in the perfect position to come back at a much lower price. On a cash flow basis, assuming MSN were profitable equal to the rest of Microsoft's properties (which are, ie Office and Windows), it would be valued at roughly $10B to $15B for owning 10% of the search market. That would put Yahoo worth $15B-$22.5B for owning almost 15% of search. Adding a premium that makes sense, lets say its worth $30B. By my math, at 1.4B shares, thats a ripe offer of $21.42/share, or a rich 38 multiple for a business with relatively meager 10-20% growth rates! Considering the company only generates cash flow of around $6B for this upcoming year, even a Google like profit margin of 37% ($7.8B profit on $20B revenues for FY09) provided by market dominance would provide at best $2.2B/year earnings in the most optimistic of circumstances. At nearly $47B for the final offer to buy Yahoo, this means it would take 21 years for the Yahoo investment to pay for itself on a earnings yield basis. Of course Ballmer's offer, assuming he actually ever wanted to finalize a purchase of Yahoo, pays such a high premium because he is betting on paradigm shift, thinking the sum of Yahoo and MSN will allow Microsoft to become the next Google, owning our online lives. Where in the history of modern business has such a successful acquisition ever occurred to beat a monopoly with these market share #s (25% total)? Even if MSN+Yahoo immediately became the next Google, $47B right now would buy Google's earnings for 6 years. Why take such large risks for such normal returns? It simply is foolish at best. The intermediate risks are too large. When in a position to grow organically, as Microsoft is in, why not do it? If creativity lacks, find it. Unless Carl Icahn and John Paulson have already secretly vetted a deal with Ballmer with a guaranteed sale of shares at a higher price, both them and any Yahoo longs are in for a surprise devaluation if they effectively gain control of the board from Yang and partners. Microsoft has no incentive to come back at these prices. $21-25 is my simplified final Yahoo buyout price target. And it'll take shares coming to $15-$20 to get Microsoft to come back to the table. I'd also venture to say that Ballmer making 'behind the scenes deals' with the likes of these hedge fund 'arbitreurs' would be foolish at best. To repurchase Yahoo at the same already inflated offer price he had the opportunity to walk away from would call his credibility, management, and bargaining prowess into even more serious question. Without Yahoo accepting this already great deal, Ballmer had the opportunity of a lifetime to rethink and revalue this deal. He would be foolish to pay more than $21-25. I may be wrong, and these billionaires may have locked into a riskless trade to sell their shares to Ballmer and Co no matter what. But what if not? Consider big money's track record of recent: Bank of America with Countrywide, recently outspoken Ken Griffin of Citadel buying some $2B of E-trade subprime debt for 27c on the dollar (now trading at 8c), Joseph Lewis on Bear Stearns, and Dubai on Citigroup. The list goes on. Most often, it is nothing but high stakes roulette, no matter how big the bets are. Big bets alone guarantee nothing, nor do they dictate fair value in the long run. Unless Ballmer is using these hedge fund players as chess pieces, this board maneuvering and shareholder 'activism' spells nothing but gigantic risk for Yahoo shareholders going forward. A perfect sell candidate. And yet, a decent buy at $11.50-$17.00 (20-30% growth for .57c of earnings) when everyone has forgotten about the possibility of a deal. http://scriabinop23.blogspot.com/2008/05/foolish-billionaires-dont-know-when-to.html
Well, then, I don't think the majority of shareholders will like the M&A idea. Right now, Icahn is accusing the current BoDs for not taking the offer at 33. I think that the deal will be closed at 33.
microsofts best bet is to go after myspace, linkedin and facebook for the right prices. for search ask jeeves has whats thought to be the best technology outside of google. yahoo is display ads and a portal site. i dont think microsoft would get proper value from buying yahoo. expensive acquisition that doesn't fix their problems in seach technology. also doesn't assist in their other product lines like the above mentioned sites would.
This time I'm betting against Ichan. I bet with him on motorola, we all saw how that one turned out. (I actually think MOT is good value right now.. but that's largely due to the fact that it's dropped 1/2 it's market value since Ichan got involved)