New MSFT-YHOO Scenarios: 60% Chance Mid-$30s Sale

Henry Blodget | February 12, 2008 10:36 AM

Citi's analysts have adjusted their odds for Yahoo's future based on recent events--and so have we. Their old and new thoughts--and ours--below.

1. YHOO Hits the $31 Bid, 0% probability. Citi originally gave this a 20% probability. We (SAI) continue to think that it's possible that Yahoo will eventually cave and sell at $31 (or worse). We put this at a 20% probability.

2. YHOO Rejects, MSFT Bids Higher, Sale Happens, 55% probability. - Citi was at 40% and has now upped to 55%. We're upping our odds to 60%. For us, that's still an 80% probability that Yahoo hits the current bid or better

3. Another Bidder Emerges & Wins, 5% probability. We put this at a 1% probability. It's not impossible, but when competing with Microsofts market cap and cash flow, it's close

4. Deal Blocked By Regulators, 10% probability. - Citi sticks to 10% chance. We still put this at 5% probability. If regulators block this deal, the regulators should be fired. How can one make an anti-trust (or other consumer protection argument) when the leader in the space will still be the leader in the space and has $17 billion in revenue? We understand why, for the purposes of this particular endeavor, Google is trying to frame "the Internet" as a PC application, but this, of course, is laughable.

5. Yahoo! Outsources Search to Google, 30% probability. Citi continues to assign a big probability to this and estimates that it could deliver 25%+ accretion to YHOO's cash flow. Whether or not search is outsourced, however, we still think Microsoft will press the deal through. The odds that Yahoo will outsource, therefore, may well be 25%, but the odds that this will deter shareholders from taking Microsoft's money are slim--14% in our opinion.