At 1PM ET Saturday, the sand in Microsoft’s hour-glass ran out. Yahoo’s (YHOO) three-week grace period is over, and all eyes are on Microsoft’s next move.
We asked Microsoft whether that move would come on the weekend, or whether we could just forget about corporate M&A wars and enjoy a Blackberry-free weekend in spring. We were politely referred to the comments Microsoft CFO Chris Liddell made on Thursday’s conference call:
[U]nless we make progress with Yahoo towards an agreement by this weekend, we will reconsider our alternatives. We will provide updates as appropriate next week.
So that sounds as though we have at least 48 hours or so to refine our bets (but we’re taking our Blackberries).
Over the past few days, Wall Street analysts, SAI readers, investors, and others have weighed in. This has provided a range of smart possibilities, many of which we have excerpted below (starting with “Wall Street”). If you haven’t weighed in yet, please do so in the comments. We’ll check back every few hours and add excerpts directly to the post.
Wall Street: Stock prices represent the collective view of millions of investors. According to the Microsoft-Yahoo Bid Calculator, the value of Microsoft’s current bid for Yahoo at Friday’s close was $29.68. YHOO closed at $26.80, almost a $3 (10%) spread. If Microsoft walks away, Yahoo’s stock will likely fall to at least the low $20s. If Microsoft and Yahoo agree to a deal at the current bid, Yahoo’s stock will probably rise to about $28.50 (there still would be some uncertainty). If the companies agreed to a deal at, say, $34, the stock would probably rise to about $32. So what is Wall Street’s bet? Wall Street appears to be relatively evenly split between:
- Microsoft walking,
- Microsoft fighting (and winning), and
- Microsoft raising its bid and the companies agreeing to a deal.
SAI: We think there is a better-than-even chance that Microsoft will withdraw its offer. We base our logic on the events of the past week (droopy Yahoo quarter, weaker-than-expected Microsoft quarter, no progress on negotiations), comments from both companies (Yahoo digs in, Microsoft starts talking about walking), and the negatives of pursuing a drawn-out proxy fight. (More detailed discussion here). We still think it is possible that Microsoft will raise its bid or fight, but a public bid raise at this point will severely reduce its credibility, and if it fights at the current price, we don’t think it is guaranteed to win. We therefore think that Microsoft might walk, crush Yahoo’s stock, and then perhaps come back later with a lower bid (and be hailed as a hero by furious Yahoo investors).
Stone: I doubt a proxy fight will be very distracting to Microsoft except for the small team of lawyers and bankers on the case. The average employee at M could give a hoot. On the other hand it will be enormously distracting to the Y workforce for the entire time it goes on. Here’s what I actually think will happen. They will walk away purposely. Microsoft will watch Y’s stock crater, then they will come back and reinstate their bid, who knows what the price will be at that point. Y’s shareholders will have to take the deal after seeing the price tank.
JoeBlow:[A] 60% chance is way too high still for an abandonment of the objective MSFT stated on Feb 1. That would mean that 60 times out of 100 observations, a company in Microsoft’s situation, one: that’s written two demanding merger letters – both of which threatened to bypass management and take the offer to shareholders directly; that’s written its own employees with presupposing communications regarding the merger; that’s only just now named what would, with a walk, be a pointless and useless slate of BOD nominees, would, just at the point of enforcing the second of two threats (the second a deadline imposed mandate) widely expressed to its own and Yahoo’s shareholders and filed with the SEC, abandon the whole process because they’ve suddenly come to, as you say, Henry, a sudden sense of “acceptance and resignation.” That’s not realistic in my view. Ballmer didn’t write acceptance and resignation into his letter of three weeks ago. [Read more of JoeBlow’s thinking here]
Mark Mahaney, Citi: [T]he most likely outcome is a deal at a somewhat (10%) higher price than the initial $31 per share offering, with four possibilities: 1) MSFT & YHOO agree at a somewhat higher price (45% probability) – The most likely scenario, we believe. 2) MSFT goes hostile with its current offer (40%) 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.
Anon: Microsoft’s going to make a cash offer (for less than $31). And if that fails, they will walk, YHOO will be trading in the teens soon thereafter, and all the cash Microsoft was going to spend acquiring Yahoo will instead be spent competing against them. Either way, advertisers and audience will leave Yahoo and Microsoft achieves their primary objective of becoming the #2 online consumer destination/advertising distributor.
Thomas: There is absolutely no way Microsoft is going to look like fools and walk away from this. Everyone in the valley would claim victory – do you really think Redmond is going to lose face like that? They backed away from offering $40/share a year ago. Now that their $31/share deal is public, there is no chance they are walking away. The would be the laughing stock of Sunnyvale/Mountain View.
Hidohoe: I do hope MSFT walks away in defeat. Drag their sorry asses back to Redmond and cry like a baby. If MSFT does walk, I agreed with Thomas, they would be a laughing stock. Look, when did management ever care about what the employees think. Of course MSFT employees hates the deal because they’re going to get canned if the deal happens. Ballmer is losing money with msn,live search sucks and their adcenter platform is crap. They’ve already tried to go it alone – look where it has gotten them. MSN unit is in the red with no end in sight.
Yo Momma: Look like fools if they walk away? Quite the opposite. It would be the only saving grace at this point. Having worked many years for Msft in the recent past, I believe the integration would be a complete disaster. It would be, by far, the largest acquisition Msft has ever attempted and the cultures have absolutely no similarities whatsoever. I guarantee, it would be a nightmare. Nobody wants it. Employees just want to see that leadership actually takes shareholder value seriously. Whether they do or don’t, the majority of employees don’t believe they do and that’s all that matters. I was an employee when I first heard about the acquisition but I’m not now. I actually thought it was a joke. At first I didn’t think Msft deserved Yhoo (meaning: I felt sorry for Yhoo people) but I’m so disillusioned with how both companies have handled it, I don’t know what to think. Classic Msft does all business negotiation via threats but Jerry and company are so delusional it leaves me speechless.
Dan Bartlett: For starters, I’m long YHOO, and it’s a considerable amount, so you can imagine my queasiness. That being said, even with everything that happened since Tuesday (both calls), I can’t see Ballmer giving up that easily. They are going to pursue online advertising organically? C’mon, that’s as good as YHOO’s ’09 and ’10 estimates: the corner of Fairydust and Magic Castle Drives. Even with Ballmer being the CEO, I can almost see him wanting to pursue the proxy fight almost for spite. I don’t think a proxy fight with a lower bid is going to work (if it’s $30 all cash, that’s one thing; if it’s $25, that’s like spitting in the faces of those you need). How much am I being objective and how much am I wrapped up in this? Will I vaporize in the morning? I just don’t know…and the Mr. Fusion in the DeLorean is once again on the blink.
Don Jones: MSFT will not walk away from this deal. Ray Ozzie’s recently published memo referred to online ad spending doubling in the next5 years or so – from $40 billion to $80 billion. Advertising for MSFT is incredibly strategic. No way are they going to walk away from the second best advertising platform out there.
Gordon: “Ballmer, if you give that f***in’ nimrod 40 five billion dollars, I’m gonna shoot him on general principle!” – Vincent Vega
The Illusionist: Microsoft has two options, raise now or raise later. Will they raise it during a friendly dance this weekend or raise it while their proxy battle unravels in the bad way it most surely is bound to. The smart thing to do will be to bring Yahoo to the table tonight, sweeten the offer and consummate before the markets open on Monday. My (overly) simplistic guess would be they raise it 10% but keep it all under $50-billion just because it’s such a scary number. If @ $31 the outlay was about $45-billion, a 10% premium would put it somewhere in the $34 range and under 50bb for the whole thing (that is still my prediction for this weekend). The reason why I think that “walking is not an option” is that nobody (with any business sense) ever puts their “final” offer “first.” Since they made that offer nothing has changed, the earnings were a wash, the projections ditto.
deecee: a proxy fight was, and is, never going to happen. it was always walk away or up the price. of course you can’t say such. now, granting all the arguments re culture clash and the great potetial that msft has no better ideas than yhoo has been able to muster recently, they probably have no worse (remember lloyd braun and the influx or media types under terry semel- stupid). my money is on msft coming to yhoo with a soft offer of $34-35 (yes, i know, not novel), which jerry will have a tough time saying no to (in front of shareholders). deep google integration (re search) will attract to much heat. and as for integration with aol, on any level, that is a question that answers itself.
Rav: [E]veryone is assuming that if MSFT walks, Yahoo goes under 20, with no opinions to the contrary. They don’t seem to realise that Yahoo shares now have MSFT put (similar to the Greenspan put). No one will believe that MSFT is going to walk for real and for ever. YHOO may go down 2-3 bucks, but then will attract lot of new stock buyers, because MSFT is eventually going to come back.
Sharone: When do you see a company walk away and then later get the target with a way lower price?
Check Oracle, its original offer to peoplesoft was 5.3B and after walk, it raised to 9B and then 10B to finalise the deal. Its original offer to beas was 8B and after its walk, it raised to 9.3B.
Cookie: Did you see what Bill Gates said on Friday? During an appearance at the University of Washington, the Microsoft chairman at one point referred to his company as if it were second in Internet search. In reality, Microsoft is in third place in search market share — although it would move into second place, still well behind Google, if it’s able to bring Yahoo into its fold. “Often if you’re No. 2 — and in this case, a distant No. 2 — you can try harder, so to speak, and try out new things that are quite different,” Gates said when discussing Microsoft’s technological ambitions in Internet search. Whether it was a slip or a sign of Microsoft’s determination to finish the deal, the comment was the closest Gates came to even alluding to the acquisition drama.
More JoeBlow: To those of you who seem to believe that MSFT never intended to conduct a proxy contest (bluffing) or any other form of direct appeal to shareholders designed to acquire Yahoo without the support of Yang and the board (all these elements collectively considered “hostile”): Do you actually believe that MSFT would write two formal letters saying that this is exactly what they would do and then abandon it suddenly now, right at the deadline?… only three weeks after the most threatening of the two letters was issued?… when Ballmer unquestionably knew at the second letter what both quarters would look like?… Had Ballmer at that time begun to have cold feet, that wouldn’t have been the time to escalate the rhetoric as he did. It would have been perfect then to abstain from such a letter, or even to begin to drop hints through the press that he, to Henry’s thinking, had possibly grown discouraged or resigned to not being successful at acquiring Yahoo. The offer was at that time already over two months old. Market sentiment and public opinion would’ve forgiven Ballmer far better then for getting cold feet than it would now if he walks after such a letter was sent.
MikeM: MSFT needs to be on the bid with open market buys. Take out every share available. It may take a few months but inevitably they will earn a spot on the Board.
More Illusionist: I won’t bet anything on the outcome of a hostile bid other than the price going much higher than in a friendly one. My guess, Micrsosft has been playing a textbook game: a) a premium opening offer, b) threats of a proxy battle, c) hints of walking away … all standard moves, nothing out of the norm. They might have banked on a bad quarter for Yahoo to help lower the sweetner but that was a calculated risk.
If this goes to proxy, I’ll bet it’s because “Yang” was completely unreasonable rather than Microsoft holding its ground.
Dean Wermer: Microsoft walks; does a couple of well-received smaller deals (not AOL). Reevaluates Yahoo at a future date depending on Yahoo state of play.
Aaron: I agree with Henry when he says 60% chance of bye bye deal. If by 60% he means 0%. What’s wrong with you Henry? You fell for the Dog and Pony show hook, line and sinker. MSFT has been looking over this deal for probably 2 years now from every angle. Do you really think they will say, (Pinch nose and repeat) “Gee, it is just to hard now, let’s just continue to tickle out balls and hope for the best because in 3-5 years we will have a perfectly horrible organically grown plan of our own.” This is all a show for the people. “Look guys how hard we are fighting for you.” Both sides already know were this deal is heading and it rhymes with $34.50. You are seeing Negotiating 101 taking place word for word. “April 26 to conclude an agreement.” Different from “Until April 26 to accept our Lowball bid right after your stock cratered.” “We may walk.” We don’t need you guys that bad.” Kind of like, “Eh, I don’t like the colour of that car that much and the fender is dinged.” You still want the car!!!
Anon: Yang doesn’t want to be acquired, and would resist even a $35 offer. There will be no friendly takeover. What there will be is a new, all-cash offer made directly to Yahoo shareholders. Take it or leave it. In an attempt to thwart Microsoft’s cash offer, Yang and co will call the Yahoo board election as soon as possible (less than two weeks). And then it’s up to the shareholders. Do you sell now for a guaranteed amount well above where YHOO ought to be trading, or do you hold and hope … for what? YHOO to hit $35 on its own? Microsoft to raise the price? Perhaps you feel like losing money on YHOO just to spite Microsoft?
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