A few months back, just before the markets collapsed, Microsoft had a $32 per share buyout offer for Yahoo!. Jerry Yang did his yin and yang dance, at the same time talking to Google about a possible tie up which would have made the sale to Microsoft unnecessary. Well, the markets collapsed, Google said adios, Jerry was left to pick up the pieces. Yahoo! shares collapsed to below $10 at one stage before recovering to be just above $12 currently.
Jerry had to step down as CEO for his stubbornness. They are still looking for a new CEO. Into the fray, many big investors and hedge funds took huge positions leading up to Microsoft's bid at $32. Carl Icahn even got onto Yahoo!'s board, and is now left holding a lot of Yahoo! shares in the mid-20s. Carl was pretty pissed at Jerry for delaying the deal with Microsoft.
Microsoft did try to talk about a lesser deal to buy Yahoo!'s search business, but Jerry was right to refuse that also as the search business is pretty critical to Yahoo!'s value as a company.
Yahoo! Inc (YHOO) Current price $12.34
52 week High-Low: $30.25 - $8.94
Google scrapped the deal with Yahoo! which was a revenue sharing deal which would have brought in hundreds of millions for Yahoo!. The deal probably would never have taken off as it is very likely to be thrown out by the Department of Justice on antitrust issues. Basically anything Google touches on internet business now would be scrutinized closely by the DOJ.
Why The Deal Will Be Done
Yahoo! cannot survive on its own for too long. Its revenue and profits will flatten out soon, thus reducing the value of the company - that being the case, it would be better to be absorbed by a bigger company that offer synergies to build on the Yahoo! platform.
DOJ most probably will reject a deal between Yahoo! and Google, but should approve a deal between Microsoft and Yahoo!.
Carl Icahn joined the Yahoo! board in August 2008, holding just under 5% shares of Yahoo!. Following the share price collapse, Carl has bought another 6.78m shares in the first week of December, bringing his stake to 5.45%.
The company is also now exploring a deal to buy or merge with Time Warner's AOL. The thing is Yahoo! cannot and should no longer exist as it is now. Following the collapse in October and November, many hdge funds have had to dump Yahoo! shares bought in the mid-20s thus creating a lot of free float.
There has been talks that Jonathan miller, the ex-CEO of AOL has been trying to assemble a few private equity and sovereign wealth funds to raise $28bn-$30bn to buy Yahoo! That works out to be between $20-$22 per Yahoo! shares. The involvement of Jonathan Miller and or AOL will put a lot of pressure on Microsoft to act soon.
Microsoft was willing to pay $44.6bn a few months back for Yahoo!, I am sure they will pay $25bn now. Microsoft NEEDS Yahoo!. So what is Microsoft waiting for? I think Ballmer is waiting for Yahoo!'s new CEO to be installed. To make a bid now with no inkling on who is running the show would make "synergy and strategy" planning obsolete.
Yahoo! has a strong brand name, a very valuable advertising and search platform, a lot of cash on its books and almost zero debt. Yahoo!'s book value is $8.36 per share.
Google made operating profits of $1.7bn last quarter on revenues of $5.5bn. Yahoo! made $70m last quarter and surprisingly AOL made $268m in the last quarter.
Microsoft needs Yahoo! because Microsoft's online revenues last quarter was $770m but registered an operating loss for THAT quarter amounting to $480m. Microsoft has dumped a lot of money for online businesses and have been failing dismally to get a foothold. It needs Yahoo!'s platform to build on its search and advertising business on the net. The biggest threat to Steve Ballmer would be IF Yahoo! falls into the hands of someone else. Even if Yahoo! is over priced or a mistake or both, its a mistake Microsoft has to make. They cannot keep losing ground to Google and just watch the trains go by.
Concluding comments: If everything is so conclusive why isn't there a bid already. The markets have basically just collapsed over the last 3 months. Credit markets have stopped functioning regularly for a while. Predators trying to raise funds to mount a bid are finding it very difficult to raise $20bn in current markets.
Microsoft knows that it does not need to raise anything to mount a bid. I am sure they will try to come up with deal that would be much lower than the $32 per share. I am also sure they would instantly be involved in a bidding war if someone else started the bidding. Under normal markets, many arbs traders would have taken positions in Yahoo!, maybe even up to $16 in anticipation of a $20-$24 buyout offer. But under current market conditions, capital for arbs may have shrunk and the many hedge funds are now tackling redemption worries rather than looking actively at potential buyout special situations.
p/s photo: Kathy Chow Hoi Mei
1 comment:
It cannot be stressed hard enough how Microsoft needs to buy over another established search engine company or Yahoo in this case.
Unlike other countries, top IT talents in US always make a bee-line to places with "culture", or in other words, places that are cool. And Microsoft no have that. (still insecure geeks rule world culture; yahoo has cool geeks rule world culture; google has superman geeks rule world culture)
So Microsoft have no other choice but to fork out billions to buy coolness from Yahoo.
Yahoo also needs Microsoft because it cannot compete with the coolness of Google. Talent is flowing out of Yahoo and so is market share. They have to stem the tide fast.
Also, in the IT world, contrary to what most people think, there exists gargantuan barriers of entry. And that barriers of entry is first mover advantage and market share/hit rate. By buying Yahoo, Microsoft is not only piercing the barriers of entry but is in fact buying that very barriers of entry. Market share in this Yahoo deal is vastly undervalued in this sense.
So Ballmer, stop haggling already! You've punished the Yang man enough. Buy Yahoo already and stop mucking around.
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