pachzevel
2008-Apr-14, 01:52 AM
TECHNOLOGY TRADER http://online.barrons.com/img/b.gif In the Yahoo! Story, the Conclusion Is Foregone
By ERIC J. SAVITZ
IN THE END, MICROSOFT WILL BUY YAHOO! NOT CONVINCED? Pull up a chair, and I'll explain why that's so obvious.
For all the Sturm und Drang, two-and-a-half months after Microsoft (http://online.barrons.com/public/quotes/main.html?type=djn&symbol=msft) (ticker:MSFT) made its $31-a-share, $42 billion stock and cash bid, not much has really changed. No one else had made a competing offer. Microsoft has not raised its bid. Yahoo! (http://online.barrons.com/public/quotes/main.html?type=djn&symbol=yhoo) (YHOO) is still fighting the inevitable. And despite huge amounts of noise, it still appears Microsoft will eventually get its way.
But last week, several developments complicated the picture. Yahoo! signed up for a short-term experiment to run ads sold by Google (http://online.barrons.com/public/quotes/main.html?type=djn&symbol=goog) (GOOG) against some Yahoo! search queries. Yahoo! also reportedly was close to a deal to buy AOL from Time Warner (http://online.barrons.com/public/quotes/main.html?type=djn&symbol=twx) (TWX) in a complex transaction in which Time Warner would end up with a 20% stake in the combined company, and Yahoo! would buy back some shares at prices above Microsoft's current offering price. Finally, Microsoft was apparently holding talks with News Corp. (http://online.barrons.com/public/quotes/main.html?type=djn&symbol=nws) (NWS) about a plan to combine MSN, MySpace and Yahoo!, creating...oh, MicroHooSpace.
http://s.wsj.net/public/resources/images/OA-AS359_BA_5DA_20080411232826.gifDowner: The pursuit of Yahoo! by Microsoft and others gave a lift, but GE's bum earnings killed the week. The Nasdaq Index ended down 3.4%, at 2290. A few days before that, Microsoft sent a letter to Yahoo! threatening a proxy fight unless it takes the current offer; charmingly, Microsoft said it would also consider lowering its bid. Yahoo! responded with a letter that basically said: Your bid is too low, but we're open to selling. Please bid more. Then we had the odd spectacle of Legg Mason mutual-fund legend Bill Miller, one of the largest Yahoo! holders, asserting he'd rather see Yahoo! reject Microsoft than take a lower bid.
Let's sort some of this out, one player at a time.
Microsoft: Microsoft wants to be a big player in online advertising, particularly in search. That market is dominated by Google, with Yahoo! a distant second. Google has about two-thirds of the domestic search market, Yahoo! 20%. If Microsoft wants to be a player, buying Yahoo! seems the only option.
Yahoo!: You might think CEO Jerry Yang is in control, but that's not entirely true. Microsoft's 60% premium bid has resulted in huge share turnover, leaving huge amounts of stock in the hands of merger arbs. Insider ownership is minimal. The Street seems convinced that the chatter about deals with AOL and/or Google simply aim to spook Microsoft into raising its bid. If Yahoo! manages to fight off Microsoft, the stock will drop $10 or more, and Yang will get whacked by shareholder lawsuits.
Time Warner: Remember when the company was actually called AOL Time Warner? Ha! It has no real interest in taking a stake in Yahoo!; it merely wants to rid itself of AOL, at last. Charlie DiBona, software analyst at Bernstein Research, last week suggested that if Microsoft really did walk away, it could instead make a bid for AOL in cash, which would likely be more appealing to Time Warner than shares in a revamped Yahoo!
A nice side-effect: This would hurt Google, which now provides search services to AOL. But the real point is that Time Warner wants out, and will eventually sell to somebody.
Google: It has been fascinating to watch Google play faux big brother to Yahoo!, helping it strategize on how to fend off that bully Steve Ballmer. Yeesh! Google wants to do whatever it can to stop a combination of its two largest rivals. CEO Eric Schmidt wants to delay any deal as long as possible and force Microsoft to pay as much as possible. Yahoo! outsourcing search advertising to Google certainly would be a cash-flow boon to Yahoo! But with a Yahoo! outsourcing deal, Google would have nearly 90% of the domestic search ad market. Does antitrust law ring a bell?
News Corp.: I think my employer's position is similar to Time Warner's. There are signs that its mighty MySpace is losing altitude. In particular, Google last quarter said it was having trouble monetizing some of its social-networking inventory -- in short, it isn't easy to sell ads on Bob the Burnout's MySpace page. For the right price, I think Rupert Murdoch would be happy to book his huge profit and move on. You could argue that Microsoft would like to bump Google out of its current role as MySpace's ad provider. Or maybe not, given that their current deal has been a disappointment.
Bill Miller: Microsoft is doing him a huge favor. At the end of 2007, Legg had almost 84 million Yahoo! shares. Its position has swelled in value by about $840 million, thanks to Microsoft's stock offer. Do you really think he would rather watch the stock drop back to $19 than take even a slightly lower bid if Microsoft actually follows through on its threat? I doubt it. And at $31 or more, he and every other institutional investor seem likely to back the offer.
So, in the end, it's simply obvious. Microsoft needs to buy. Yahoo! needs to sell. The rest is a sideshow.
By ERIC J. SAVITZ
IN THE END, MICROSOFT WILL BUY YAHOO! NOT CONVINCED? Pull up a chair, and I'll explain why that's so obvious.
For all the Sturm und Drang, two-and-a-half months after Microsoft (http://online.barrons.com/public/quotes/main.html?type=djn&symbol=msft) (ticker:MSFT) made its $31-a-share, $42 billion stock and cash bid, not much has really changed. No one else had made a competing offer. Microsoft has not raised its bid. Yahoo! (http://online.barrons.com/public/quotes/main.html?type=djn&symbol=yhoo) (YHOO) is still fighting the inevitable. And despite huge amounts of noise, it still appears Microsoft will eventually get its way.
But last week, several developments complicated the picture. Yahoo! signed up for a short-term experiment to run ads sold by Google (http://online.barrons.com/public/quotes/main.html?type=djn&symbol=goog) (GOOG) against some Yahoo! search queries. Yahoo! also reportedly was close to a deal to buy AOL from Time Warner (http://online.barrons.com/public/quotes/main.html?type=djn&symbol=twx) (TWX) in a complex transaction in which Time Warner would end up with a 20% stake in the combined company, and Yahoo! would buy back some shares at prices above Microsoft's current offering price. Finally, Microsoft was apparently holding talks with News Corp. (http://online.barrons.com/public/quotes/main.html?type=djn&symbol=nws) (NWS) about a plan to combine MSN, MySpace and Yahoo!, creating...oh, MicroHooSpace.
http://s.wsj.net/public/resources/images/OA-AS359_BA_5DA_20080411232826.gifDowner: The pursuit of Yahoo! by Microsoft and others gave a lift, but GE's bum earnings killed the week. The Nasdaq Index ended down 3.4%, at 2290. A few days before that, Microsoft sent a letter to Yahoo! threatening a proxy fight unless it takes the current offer; charmingly, Microsoft said it would also consider lowering its bid. Yahoo! responded with a letter that basically said: Your bid is too low, but we're open to selling. Please bid more. Then we had the odd spectacle of Legg Mason mutual-fund legend Bill Miller, one of the largest Yahoo! holders, asserting he'd rather see Yahoo! reject Microsoft than take a lower bid.
Let's sort some of this out, one player at a time.
Microsoft: Microsoft wants to be a big player in online advertising, particularly in search. That market is dominated by Google, with Yahoo! a distant second. Google has about two-thirds of the domestic search market, Yahoo! 20%. If Microsoft wants to be a player, buying Yahoo! seems the only option.
Yahoo!: You might think CEO Jerry Yang is in control, but that's not entirely true. Microsoft's 60% premium bid has resulted in huge share turnover, leaving huge amounts of stock in the hands of merger arbs. Insider ownership is minimal. The Street seems convinced that the chatter about deals with AOL and/or Google simply aim to spook Microsoft into raising its bid. If Yahoo! manages to fight off Microsoft, the stock will drop $10 or more, and Yang will get whacked by shareholder lawsuits.
Time Warner: Remember when the company was actually called AOL Time Warner? Ha! It has no real interest in taking a stake in Yahoo!; it merely wants to rid itself of AOL, at last. Charlie DiBona, software analyst at Bernstein Research, last week suggested that if Microsoft really did walk away, it could instead make a bid for AOL in cash, which would likely be more appealing to Time Warner than shares in a revamped Yahoo!
A nice side-effect: This would hurt Google, which now provides search services to AOL. But the real point is that Time Warner wants out, and will eventually sell to somebody.
Google: It has been fascinating to watch Google play faux big brother to Yahoo!, helping it strategize on how to fend off that bully Steve Ballmer. Yeesh! Google wants to do whatever it can to stop a combination of its two largest rivals. CEO Eric Schmidt wants to delay any deal as long as possible and force Microsoft to pay as much as possible. Yahoo! outsourcing search advertising to Google certainly would be a cash-flow boon to Yahoo! But with a Yahoo! outsourcing deal, Google would have nearly 90% of the domestic search ad market. Does antitrust law ring a bell?
News Corp.: I think my employer's position is similar to Time Warner's. There are signs that its mighty MySpace is losing altitude. In particular, Google last quarter said it was having trouble monetizing some of its social-networking inventory -- in short, it isn't easy to sell ads on Bob the Burnout's MySpace page. For the right price, I think Rupert Murdoch would be happy to book his huge profit and move on. You could argue that Microsoft would like to bump Google out of its current role as MySpace's ad provider. Or maybe not, given that their current deal has been a disappointment.
Bill Miller: Microsoft is doing him a huge favor. At the end of 2007, Legg had almost 84 million Yahoo! shares. Its position has swelled in value by about $840 million, thanks to Microsoft's stock offer. Do you really think he would rather watch the stock drop back to $19 than take even a slightly lower bid if Microsoft actually follows through on its threat? I doubt it. And at $31 or more, he and every other institutional investor seem likely to back the offer.
So, in the end, it's simply obvious. Microsoft needs to buy. Yahoo! needs to sell. The rest is a sideshow.