Like Steve Ballmer, Wall Street appears to be getting tired of Yahoo’s waiting game (YHOO).
It has been a while since big shareholders like Legg Mason’s Bill Miller came out publicly to say that Microsoft (MSFT) needs to raise its bid to $35 a share. Privately, we hear, some big shareholders are increasingly grumbling that Yahoo is grasping at straws and getting terrible M&A advice. The market is increasingly concluding that Microsoft won’t raise its offer (thus the stock drop yesterday, despite Yahoo’s letter to Steve Ballmer). As MarketWatch’s Therese Poletti observes, even sell-side analysts are starting to pile on the company:
“Yahoo management position is still that Microsoft’s bid is too low and undervalues the company,” said Charles Di Bona, a Bernstein analyst, in a note to clients. “Investors are becoming increasingly sceptical and there appears to be growing concern that this view is both unrealistic and self-interested on the part of Yahoo’s management”…
On Feb. 11, Cowen & Co. wrote that Microsoft could take its bid to at least $35. But on Monday, analyst Walter Pritchard wrote “the letter sets in motion a process that is most likely to result in a transaction at or below the current bid price.”
Contrary to Yahoo’s assertion that it had received “positive feedback” from shareholders about its three-year financial plan, moreover, investors and analysts are increasingly ridiculing this, too. In an email exchange with SAI, one analyst described the plan as “a joke” and said he had heard no investor say positive things about it. Theresa Poletti quotes Bernstein’s Di Bona as saying something similar:
“The Yahoo investor presentation cut no ice with investors,” Di Bona of Bernstein wrote. “We saw the publication of Yahoo’s Investor Presentation on March 18 as final confirmation that Yahoo’s management and board had run out of ideas.”
A consensus is also growing that Yahoo’s claim that its Q1 was “consistent” with its previous forecasts likely means that revenue came in at the low end of the forecast range. If this is the case, the low-level grumbling of analysts and investors is likely to surge into a full-blooded howl.
The good news for Jerry & Co is that they know something the market does not: what the Q1 numbers really were. Yahoo’s performance in Q1 will determine the next act of this drama, as well as what stance toward Microsoft Yahoo should take.
If Yahoo’s Q1 was weak (low end of the guidance range), Jerry & Co. should start negotiating with Microsoft immediately. If Q1 was strong, then Jerry can afford to stonewall until Yahoo releases its Q1 results–at which point, the company’s insistence that it is worth more than $31 will gain credence, and confidence in Yahoo’s management might start to return.
We think Yahoo’s M&A team probably sees the situation similarly (or should). Thus, if Yahoo does not start negotiating with Microsoft this week, we will gradually conclude that Yahoo’s Q1 was OK. If Yahoo rushes to negotiate in the next day or two, meanwhile, we will conclude that Q1 was a bomb.
One thing is certain, though: If Yahoo’s Q1 was weak and Yahoo ignores Microsoft right through the Q1 results, Yahoo’s shareholders will likely lose all remaining faith in the company.
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