the microsoft yahoo saga

Posted on February 15, 2008


Yahoo must really hate the idea of being bought over by Microsoft, or else its management is living in dreamland. Or perhaps it is just playing the game of extracting a higher price from Microsoft.

In the hope of fending off the Washington-based giant after rejecting its offer, Yahoo started leaking word that it is in talks with companies like Time Warner and News Corporation for a partnership.

Unfortunately, the plan that Yahoo and News Corp is allegedly discussing is uninspiring, to say the least.

The talk is that News Corp will pump money into Yahoo, taking a 20 per cent stake, while redirecting its hugely popular social networking site MySpace towards Yahoo’s care.

But where is the benefit of this for Yahoo?

Yahoo stands to gain eyeballs but that would not help it in the areas that matter, such as working out a strategy to transfer those views into advertising dollars or capturing a bigger share of the internet search market.

Shareholders at Yahoo will surely cry foul at an inferior deal if the News Corp and Yahoo talks work out.

Financially, it does not make sense for Yahoo to walk away from the huge premium that Microsoft has offered it, the stock and cash offering currently to the tune of around $42 billion, which values Yahoo’s shares at $31 each, over the stock’s price of $19 apiece when Microsoft first made its offer about two weeks ago.

Yahoo can expect lawsuits from shareholders if it chose News Corp over Microsoft. It would also make it easier for Microsoft to force out Yahoo’s board members with the reason that it is not working in its shareholders’ best interests. In fact, one of Yahoo’s largest shareholders, investment firm Legg Mason, is supporting the tie-up, if Microsoft would offer a little more.

Given the circumstances, analysts believe Yahoo’s strategy of speaking to News Corp is a calculated gamble to wring a higher price out of Microsoft. Talk is that Yahoo believes it should get about $40 per share.

But Yahoo really does not have much of choice here. If it pushes too hard and turns Microsoft off, it risks seeing its share price plunging.

There are effectively no other buyers out there with the kind of deep pockets, and more significantly, the cash reserves, of Microsoft. No other company would make as bold a move as Microsoft’s. In fact, Microsoft has been seen as over-valuing Yahoo and putting in too high of a bid. Its offer is a great opportunity for Yahoo to cash out, since it is now a middle-aged operator in the tech world, possibly running out of ideas to compete with the likes of Google.

The more meaningful thing for Yahoo to do now is to sit down and negotiate a better price and arrangement with Microsoft.

So like it or not, Microsoft swallowing up Yahoo is pretty much inevitable. Yahoo should suck this up and take the money below it is too late.