Microsoft Bid for Yahoo Drops To $29.50 a Share

As Yahoo waits in vain for other bidders or deal alternatives to emerge, the dissatisfaction of Microsoft investors with the Yahoo bid has reduced the value of Microsoft's offer to $29.50 a share.

Why?

• The bid is half-cash / half-stock,
  
• Microsoft's stock price has dropped about 10% since the offer was announced, and
  
• the share exchange ratio is fixed at 0.9509 Yahoo shares per Microsoft share.

Last Friday, when Microsoft's stock was trading at about $33, 0.9509 Microsoft shares were worth $31. Now, with Microsoft trading at about $29, the same 0.9509 shares are only worth about $28.

If/when the deal is consummated, each Yahoo shareholder will be able to choose cash or stock, with a maximum of half of the total compensation being paid in cash.  If the transaction happened today, therefore, the average shareholder would receive:

• $31 per share in cash
• $27 per share in stock

For total compensation of about $29.50 a share.

Unless Yahoo shareholders are willing to accept a reduced offer, in other words, Microsoft could soon find itself in a sticky situation: The more Microsoft's stock drops, the more expensive the deal gets--because the company will have to reset the exchange rate to get the take-out value back to $31 a share. In so doing, it will increase dilution, leaving its existing shareholders holding a smaller percent of the combined company.

Microsoft shareholders are already unhappy with the proposal--and they're only going to get more unhappy as the deal gets more expensive. The more unhappy they get, the more the stock will drop, and the more the stock drops, the more expensive the deal will get, and so on...

See Also:
A Yahoo White Knight Emerges! Microsoft's Unhappy Shareholders
Why the Yahoo-Microsoft Deal Will Be a Disaster
Dear Jerry and Steve...Here's the Answer
Yahoo in Play: Your Handy Guide to the Deal of the Decade

Yahoo may yet be saved--by Microsoft's shareholders.