Despite having little in the way of leverage over Microsoft (MSFT), Yahoo (YHOO) rejected the software giant's $31 per share bid, deeming it inadequate. With no clear opposing bidders at this point, most industry sources simply think Yahoo will try its best to drum up interest from other parties, or at least that perception, in order to get a little more money out of Microsoft. Since the $31 offer is half stock and half cash, it only represents about $29 right now based on a lower MSFT share price ($28).
A Microsoft deal is still most likely, perhaps at $33 or $34 if Yahoo is lucky enough to get a higher offer. All of this back and forth commotion will likely keep Microsoft's stock price under pressure. When it is all said and done, there will likely be an attractive entry point for that stock. Should Yahoo agree to a deal with them, the merger arbs will be shorting MSFT until the deal closes. But after that, Microsoft shares will look very cheap.
Even at current prices ($28), prior to a higher bid or arb selling pressure, MSFT sells for 14 times this year's earnings. For a company with double digit earnings potential going forward, that's a very reasonable price. Should it get even cheaper, more value investors will likely get involved, regardless of their opinion of a Yahoo tie-up.
Update: 8:15AM (forgot to add the disclosures)
Full Disclosure: Long shares of Yahoo at the time of writing
Monday, February 11, 2008
Yahoo Says "No Thanks" To Microsoft, For Now
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3 comments:
I agree that MSFT looks cheap and bought some myself, just too early. But for buying YHOO now, I think it's a tough merger arb play from these levels, with limited upside and big downside. The chances of a competing bid to MSFT's is very low: Google won't bid for antitrust reasons, IAC and News Corp said they are not interested. Who else could bid? Yahoo rejected the bid, but I'm not sure they want a better price or to stay independent. A hostile approach by Microsoft won't work because key employees and executives will probably leave, it's not in Microsoft's interest to go hostile. If Yahoo insists being independent (the wrong thing to do for Yahoo shareholders) the stock can collapse from here. What is your take on this?
I agree with you that there is little chance of competing bids. I don't think YHOO could stay independent and watch their stock go back to 18. So, they are likely just trying to get a little more $ out of MSFT.
I am not suggesting people buy YHOO today. I was assuming YHOO agrees to a MSFT deal at some price, at which time the merger arbs will step in and MSFT shares will see selling as a result.
Of course, the merger arbs could get crushed if the Feds block the deal.
I agree msft looks interesting here, without yhoo. but my initial take shows the deal is dilutive to earnings for msft, plus it depletes the company's sizeable cash hoard. paying 20+ times ebitda (ex-cash and stakes in asian internet companies alibab and yahoo japan) seems excessive - and then to raise it (especially given execution risks with merger) seems foolish.
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