Citi analyst Mark Mahaney, like many of our readers, doesn’t think much of our “60% chance that Microsoft (MSFT) walks away from the Yahoo deal.” On the contrary, he says, Microsoft (MSFT) has “no plan B.” Consequently, the Yahoo (YHOO) bid is going up!
We continue to believe that the most likely outcome is a deal at a somewhat (10%) higher price than the initial $31 per share offering. Four Near-Term Deal Possibilities:
1) MSFT & YHOO agree at a somewhat higher price (45% probability) – The most likely scenario, we believe. MSFT seems too committed to walk away. YHOO’s Board would be hard-pressed to turn down a sweetened bid. And previous Internet deal multiples would support a raise.
2) MSFT goes hostile with its current offer (40%) – If there’s no reaction at all from YHOO’s Board, we think MSFT would be true to its word and go hostile. We think the degree of likelihood that 50% of shares would be tendered at the current offer is highly uncertain. And a hostile bid raises integration risk.
3) MSFT Walks (10%) — Would MSFT really walk away after stalking YHOO for two years?! MSFT has $1B in operating losses to show for its organic Internet efforts over the last year. Google continues to take Search share and is entering Display. And no other move could address the scale/liquidity challenge of MSFT’s ad platform.
4) MSFT & YHOO reach an agreement at the current price (5%) – YHOO’s Board seems adamant that the current bid undervalues the company.
Here at SAI, we now see the proxy fight approach as running third behind 1) Walk, and 2) Raise bid. We just don’t think a bloody proxy fight makes sense, in part because it is distracting, harmful, and not guaranteed to succeed. Even if it succeeds, moreover, many of the assets Microsoft is hoping to buy will likely just walk right out the door.
So we think Microsoft’s two primary debates this weekend will be to walk or raise the price. If they go the latter route, we don’t think a dollar or two is going to cut it. Which means that, after his remarks on yesterday’s conference call about Yahoo’s “unrealistic expectations,” CFO Chris Liddell is going to have some explaining to do.
See Also: 60% Chance Microsoft Walks
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