In our opinion, when Yahoo’s board announces a decision on the Microsoft bid (hopefully late this afternoon), it will likely be one of three things:
“No” to Microsoft (20% chance). This could come in the form of the much-ballyhooed search outsourcing deal or just a polite “no, thank you” in the hope that Microsoft will choose not to pursue a proxy battle. The latter would be an unpopular decision with many Yahoo shareholders and would almost certainly lead to protests and lawsuits (unless Yahoo could later indicate that it was just a negotiating play). We personally think the Yahoo-Microsoft deal will be a disaster, and, as shareholders, we wish Yahoo had a better alternative. But Yahoo’s board is legally obligated to act in the best interests of Yahoo!’s shareholders, and we think they will have a devil of a time persuading those shareholders that they were better off a week ago with the stock at $19.
“Yes” to starting talks with Microsoft and “No” to the current terms of the deal (60% chance). This would be code for “yes, we’re going to accept your offer, but first we’re going to try to get a higher price.” We think it’s unlikely that Microsoft will raise its bid–why should it, when Yahoo has no alternative?–and we think it is even less likely now that Microsoft’s shareholders are peeing all over the deal. (See the 10%+ drop in Microsoft’s stock price.) That said, engaging with Microsoft would buy time, and it would also be theoretically possible that the negotiating sessions could lead to a better Microsoft deal, one that wouldn’t be a disaster.
“Yes” to Microsoft at the current offer (20% chance). Unlikely. Why not at least try to get a bit more money and/or hammer out a solid strategic plan? Since Microsoft made the offer, its value has dropped to just below $29 a share. At the very least, therefore, we would expect Yahoo to ask Microsoft to reset the exchange ratio to produce a final value of $31. Why should Yahoo’s shareholders take the risk that Microsoft’s shareholders will continue to pee on the deal?
Why the Yahoo-Microsoft Deal Will Be a Disaster
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