Late Friday, we reported that a private equity firm such as Quadrangle Group might be called upon (by Jerry Yang) to act as a white knight and save Yahoo (YHOO) from falling into the clutches of Microsoft (MSFT). We’ve made an inquiry or two since then and have not gotten a denial.
But could a private-equity firm like Quadrangle actually out-muscle Microsoft and win Yahoo? Probably not.
Such a firm would almost certainly be able to win over Yahoo management (You’ll keep your job, we’ll take the company private, fix it, and refloat it to cheers), but winning over Yahoo’s current shareholders is a different story. A private-equity / Yahoo management partnership might bring about an increase in Microsoft’s offer, but the odds of actually winning control of the company are slim.
Think about it: Microsoft has a $300 billion market cap, $20 billion in cash, and more than $15 billion in annual free cash flow. Its offer for Yahoo has no financing contingency–meaning that it doesn’t have to go out and sell bankers or anyone else on the deal. It can just issue some stock to pay for half of Yahoo and write a check for the rest (and have its bank account replenished in little over a year).
Compare this to a private-equity firm. It can jawbone about how great a deal it’s offering, but at some point it will have to come up with some serious cash. Yahoo’s trailing EBITDA is about $1.4 billion. Even with a very aggressive leverage ratio of 8X, the maximum amount of debt-financing the firm would be able to raise would be $10-$20 billion. (OK, the firm might be able to quietly persuade banks that, by ordering mass firings and other cost cuts six minutes after the deal closed it could double EBITDA to $3 billion, but even then you’re talking $25 billion in debt.) Even with $25 billion in debt, moreover–which won’t be an easy sell–the firm would have to come up with at least another $20 billion of equity. That’s checking-account fluff for Microsoft, but it’s a considerable slug of money for even a big private equity firm.
And then there’s the financing contingency. Have you noticed that private-equity firms occasionally welch on deals these days? They commit to buying the company –and then, a few months later, when banks push back, they change their minds.
So how much better a deal would private equity have to offer Yahoo shareholders to get them to take a chance that
A) the firm might not be able to raise the cash, and
B) it might back out in the end?
Answer? Probably a lot better.
And then you have to factor in Microsoft’s response. What do you think Steve Ballmer will do if Jerry Yang stands up a press conference with Quadrangle partner Steve Rattner (left, No. 32 on SA 100) and ex-Yahoo president-turned-Quadrangle partner Dan Rosensweig and says “Fellow Yahoos, I’m pleased to announce that we’ve saved the company. Quadrangle is going to help us go private at $32 a share!”
That’s right: Ballmer will offer $34. And he will keep raising his offer until Quadrangle and/or its investors finally say, “Jerry, we’d love to help, but you’re on your own.”
Now, this outcome wouldn’t be a bad development for Yahoo shareholders (or Jerry, who owns a few shares himself). But it’s not going to stop Yahoo from becoming a division of Microsoft.
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