Microsoft-Yahoo (YHOO): Has Microsoft (MSFT) Really Walked Away?

Henry Blodget | May 5, 2008 9:20 AM

steve-ballmer-microsoft-2.jpgDid Microsoft (MSFT) really walk away from the Yahoo (YHOO) deal? Or was the weekend's behavior just yet another negotiating tactic? Or, more importantly, if it wasn't intended to be a negotiating tactic, will it become one, as Yahoo's shareholder rebellion grows?

Despite Yahoo's suggestion to the contrary, we have yet to hear from a single Yahoo shareholder who publicly supports Yahoo's board's decision to hold fast at $37. Legg Mason's Bill Miller, once Yahoo's biggest supporter in the quest for a higher bid, seems dismayed. Employees seem dismayed. The market seems dismayed.

And no wonder: Yahoo has made every point it can in its insistence that $31 "substantially undervalues" the company, and despite all of this--including the much-ballyhooed Google search partnership--and the market still says Yahoo is worth all of $22.

It doesn't seem inconceivable that, over the next few days, Yahoo shareholders will effectively insist that negotiations be re-opened--in which case, Microsoft will have "gone hostile" without going hostile, just by walking away. And if negotiations are reopened as a result of shareholder unrest, of course, the advantage will have shifted overwhelmingly to Microsoft.

See Also: Yahoo: Out of Touch

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27 Comments

beefy said:
How much of the 22/shr is due to the possibility the msoft comes back? If they strike a deal with AOL/MySpace/Facebook, where does that put YHOO?
Jasonious said:
Nah, it's over.
Parker said:
MSFT has invested a lot of time and money into this and so I think it should be clear that MSFT will make a raised offer and the deal will get done...

This is just some drama for the skeptics and a show for the regulators
Henry Blodget said:
Some of the $22 is clearly attributable to the possibility of a Microsoft deal.
Mike said:
after all the time and money and clear admission by msft that their online business is worthless msft stock should be at 26. Why is it up? because its just a short shake maneuver. Higher bid is coming
FM said:
MSFT is gone. YHOO's response to the bid was awfull. MSFT must wonder how hollow Y is. Yang and the BOD will be gone in short order.
duplex said:
Ballmer doesn't want AOL. Ballmer still wants Yahoo. AOL may try and interpose itself in that equation e.g. we have a tentative understanding for merger terms with Yahoo, why don't you (MS) trump those terms and buy us now, then you could always pick off Yahoo later, otherwise if we merge now with Yahoo it may prove you'll never be able to get hold of Yahoo. Ballmer shouldn't, & likely won't, fall for it. Yang would have merged with/acquired AOL before this MS saga ever began if he'd believed it the right move for Yahoo. To do that now would be his second pirouette (if it emerges he first outsources search to Google, something he'd also previously considered and rejected) conclusively demonstrating Yangs/Yahoo's strategy had become & still was myopically preoccupied on resisting MS at all costs. Would Y shareholders now tolerate that when it's clear an MS acquisition has been, and will continue to be, their best path by far to realize value?
Yo Momma said:
It seems clear from the reaction of both stocks this morning that the market still believes a deal is coming. I'm wondering what the market would consider to be a good deal for msft at this point. I'm rather shocked at the lack of movement in msft this morning. It seems no matter the result, it's a negative for msft. So, Henry, what's considered a positive result for them?
Walt French said:
@Yo Mamma -- I read the bump UP in MSFT's price as a "thank God" response by investors for whom YHOO represented a way to buy an aging, second-tier technology with customers who would flee in a hurry.

And whatever happened to the considerations that employees would walk under a MSFT deal? Any sense that MSFT was just screwing w the firm would be met with resignation (by those who can't jump ship) at best, and with a resignation by those who can.

General Motors built one H of a business by consolidating the hundred or so small auto manufacturers; it lasted about 50 years. I don't see how MSFT has the luxury in a space defined by hot trends, instant exchange of news & ideas, and ultra-low barriers to entry.

Whatever MSFT's original intentions, this has been a useful exercise in re-examining assumptions about franchise value, etc. Not good news for YHOO.

And from another perspective: Merger/Acquisition deals tend to fall apart in weak markets, as either the purchase price or the value of the acquiree is called into question. (You see this in the returns of Merger Arb hedge funds... they look like selling puts on the S&P.) Both valuations were volatile here, plus we have a lot of uncertainty about the economic growth going forward. It's hardly surprising that this deal failed. All the churn means it'd be foolhardy to try it again, at least within a year.
Rurik Bradbury said:
The 22 would be 18, if not for the fact that a deal still looks likely. Yahoo has no place else to go -- its business model is defunct and MSFT is the last big opportunity to cash out before YHOO simply fades into the night.
Montecristo said:
What's this talk of 22...YHOO is trading close to $25 now
Oli Burgess said:
The YHOO and MSFT shareprices show to me that Wall Street still believes the deal is gonna happen. Ballmer hasn't just walked away - YHOO's been in his sights for years, and as soon as its shareprice falls low enough(in a few months) he'll be back.
Yo Momma said:
Ok. I'm at a loss for any logical explanation. What's going on with both stocks? Even if investors feel the deal is still going to go through, how is this a negative for msft? The odds is that there's no way it's going through >$31/share. Correct?

Big Stu said:
How come Apple is not mixing in this whole Brew-ha, that would be interesting.
clickbot said:
Henry, I will give you 20 bucks if you stop writing about this crap for 10 days.

This is more than you are making from your ads, I bet (not that I see them anyway).

Actually, forget the 20 bucks, it's easier to skip the articles :)
Interesting Business News (URL) said:
I read about this in New York Post's business news section..I definitely think it's done and Microsoft has walked away, but keep an eye out for Google to end up making a deal.
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