Yahoo’s “rejection” of Microsoft’s $31 bid isn’t a rejection but a counter-offer of $40 a share. It remains to be seen whether the company will state this explicitly in its letter to Microsoft (unlikely), but it has already sent the message through theWall Street Journal. So the next question is…how will Microsoft respond?
The answer likely depends on how impatient Steve Ballmer is. Microsoft is in a strong position. No other bidders for Yahoo have emerged, and none are likely to. Yahoo has now indicated that it won’t refuse to sell the company–thus forcing Microsoft to decide whether to pursue a hostile takeover–and many Yahoo shareholders have gone on record saying that they like the $31 deal (although they’d no doubt like a $40 one better).
Microsoft might therefore choose to take another page out of Rupert Murdoch’s playbook by saying, politely, that it’s not going to raise its offer and that it hopes to persuade Yahoo’s shareholders to take it. And then, as Yahoo’s stock drops back to the mid-20s and shareholders begin to grumble that Yahoo should have just accepted the bid, Microsoft will slowly ramp up its charm offensive.
After the Bancrofts rejected Murdoch’s bid for Dow Jones, Murdoch quietly launched a full-court schmooze. Specifically, he met with the Bancrofts and reassured them that he wasn’t going to destroy their baby. In Yahoo’s case, there are no controlling shareholders to win over, but there are plenty of big ones. And Steve Ballmer has already met with the largest–Capital Research and Management–last week.
Cap Group Meeting in NY Post: A Message to Yahoo
The stated reason for the Ballmer-Cap Group meeting, as leaked to the New York Post, was Cap Group’s desire to see if Ballmer was considering raising his Yahoo bid. Cap Group also owns 6% of Microsoft, and it was reportedly concerned that if Ballmer raised his bid, Cap Group would lose more on its Microsoft position than it made on its Yahoo one.
This may have been one reason for the Ballmer-Cap Group meeting, but there were undoubtedly others (Ballmer wanting to take Cap Group’s temperature). News of the meeting was also obviously leaked for a reason (Microsoft and Capital Group are perfectly capable of keeping their mouths shut unless they have some ulterior motive). Our guess? Team Microsoft wanted to tell Team Yahoo that Yahoo’s largest shareholder was already pressuring Steve Ballmer NOT to raise his bid.
Risks to Waiting? Some, But Slim
There are some risks to Microsoft’s biding its time, of course. No other bidders have emerged, but given enough time, Yahoo might be able to put some kind of alternative deal together. Yahoo has already used the Journal and NYT to suggest that it has an alternative–outsourcing search to Google*–but this isn’t really an alternative and Microsoft probably won’t be fooled by it. One other issue that makes time a factor: Yahoo may deteriorate as an asset if a prolonged period of purgatory causes its best people to leave. Microsoft can’t start locking up executives until it gets a commitment, and in the meantime, many executives may exit.
Microsoft may well be willing to raise its offer by a couple of dollars, especially, if, as the NYT reports, it was ready to offer $35 until Yahoo blew Q4. But if Microsoft’s “final offer” is, say, $35, there’s no reason to make an explicit counter-offer now. Instead, it can wait until the parties are at the table and throw in a concession to make Yahoo feel like it has won something. It’s also worth noting that, based on Microsoft’s current share price, the offer isn’t $31 but $29. So Microsoft’s last- minute concession could merely be to hike the offer back to the original bid.
Our current guess, therefore, is that Microsoft will respond to Yahoo’s counter-offer by trying to win over Yahoo’s big shareholders and biding its time.
*Note that the first leaks about the Yahoo board meeting reported that Yahoo’s board had considered two options–pressuring Microsoft to raise its bid OR doing a search deal with Google. This either/or story was no doubt choreographed, as, obviously, were the leaks.
Curt Monash from TextTechnologies responds:
It’s all nonsense. According to Microsoft’s 10-K statements, they have $27 billion in cash and equivalents and have $14-17+ billion/year in cash flow from operations. Assume they have to pay $40/share for Yahoo’s 1.4 billion shares in an all-cash deal (meaning they have to borrow around $30 billion). Assume that building out data centres adds a couple of billion of dollars a years in new capital costs. They can still pay all the debt back in three years. It’s all a non-issue, if they think the acquisition is worth it.
So is it? I see tons of synergies, but I’ll confess to not having quantified them. I’m also more optimistic about post-merger execution than many observers are. I do think Microsoft will have to pay up to complete the deal.
And I think Henry Blodget is proposing a false dichotomy when he suggests Microsoft is wrongly favouring ad-supported online software over subscription online software. Ad-supported personal use and subscription-supported enterprise use can co-exist.
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