YHOO/MSFT Bidding War? MSFT to Raise Offer? Doubtful

Two key questions following Microsoft's semi-hostile $31 offer for Yahoo:

1. Will other suitors emerge, triggering a bidding war?
2. Will Yahoo be able to force Microsoft to raise its offer?

Our initial answer to both: "No" and "No."

Will Other Bidders Emerge?
The obvious candidates here are:

• Google
• Traditional media companies including Time Warner, Viacom, CBC, News Corp, and Comcast
• AT&T
• eBay
  

Google is the only company that can really afford to try to top Microsoft's $45 billion offer, and we don't think Google will go this route. Google has already antagonized media companies, Madison Avenue, Silicon Valley, and government regulators by being so darn dominant in the online advertising and cloud computing industry. We think it is highly unlikely that Larry, Sergey, and Eric will conclude that Micro-Hoo is such a competitive threat that they have to try to block this deal. (And we think they would be smart not to conclude that.)

Traditional Media Companies. The hurdle with a traditional-media bid is that they can't afford Yahoo at $45 billion. After the disastrous AOL merger, Time Warner won't even consider it. News Corp or Comcast might consider the idea, but both have relatively puny market caps. And there's no way Murdoch or Roberts is going to trade away half of the companies their families have built over 30+ years to try to steal Yahoo from Microsoft. 

Traditional media companies will also obviously understand that, if they bid, Microsoft will just raise its offer until it wins. Microsoft has boatloads of cash and a $250 billion market cap.  It's no contest, so no deal.

AT&T. Unlike the traditional media companies, AT&T has a $230 billion market cap and can therefore afford a $45 billion deal. The acquisition might make some strategic sense, although the companies are really in entirely different businesses. The culture clash, moreover, would reverberate around the world, and AT&T would eventually destroy Yahoo. To actually steal Yahoo away from Microsoft, moreover, we think AT&T would have to be prepared to pay $75 billion, and even then Microsoft might just keep topping its offer. So we imagine there will be a few crash meetings with investment bankers over the next couple of days, but we expect AT&T will wisely take a pass.

eBay.  A combination here makes sense strategically, and we suppose it is not outside the realm of possibility that eBay will suddenly counter.  Again, however, price is a big problem. eBay's recently diminished market cap is only $38 billion. By the time a counter-offer premium is baked in, eBay would be looking at a $50 billion offer, which would leave eBay shareholders with about a third of the combined company (they will enthusiastically support this when hell freezes over). And that's before Microsoft makes its counter- counter-offer, at which point eBay itself would become a tuck-in acquisition for Yahoo. Unfortunately, eBay's market cap deflated at the wrong time.

Will Microsoft Be Forced to Raise Its Offer?

Doubtful. Jerry and the rest of Yahoo's board will probably reach out to Google and AT&T to see if they can get a competitive bidding war going, but we think this is unlikely (for the reasons above). Behind the scenes, Jerry may also try to get Microsoft to raise its offer, but unless he can persuade a majority of the Yahoo shareholders that they're better off telling Microsoft to take a hike, there's no reason for Microsoft to do this.

Bottom line: There will likely be some feeble protests that Microsoft is stealing Yahoo, and some hopeful overtures to Google and AT&T, but they'll soon fade away. This is an offer Yahoo can't refuse, and we suspect Jerry, Sue, and the board know it.

MORE ANALYSIS of MICROSOFT FOR YAHOO:
Complete Coverage: Microsoft's Bid For Yahoo!
Microsoft Conference Call: No Color on Yahoo Reaction
Analysis of Microsoft Bid for Yahoo: Brilliant Move, Deal Going Through
Micro-Hoo: Combined Financial Performance (including cost synergies)
Microsoft Letter to Yahoo Board

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Microsoft Wants to Buy Yahoo Again
How to Structure a Microsoft-Yahoo Deal
One Problem With a Microsoft-Yahoo Deal: MSN is Only Worth $10 Billion
Proof that Microsoft Plans to Buy Yahoo?
Playing the AOL-Yahoo-Microsoft Chess Game

Why Microsoft Needs to Buy Yahoo:
MSN: Still Sucking Wind After All These Years

And What About AOL? Join the Party!
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