We think it is unlikely that Carl Icahn will win his Yahoo (YHOO) proxy fight. We also think that, even if he wins the proxy fight, he will have a tough time persuading Microsoft to buy the company for anything close to $34 a share.
With regard to the proxy fight, we still don’t think Carl Icahn has a plan for Yahoo other than selling to Microsoft (and using the threat of a Google deal to force a sale to Microsoft). Carl Icahn can’t win the proxy fight without the support of Yahoo’s big institutional shareholders (Capital Research and Legg Mason, for example), and without a compelling Plan B, we don’t think he’s going to get it. (See “Sorry, Carl, We’re Not Voting For Your Proxy Slate” for details).
With regard to the $34 a share, we believe that if Yahoo had handled the original Microsoft offer better, the two companies would have agreed to a deal at $34-$35 in mid-February. In February, this was the clear middle ground between Microsoft’s original $31 and Yahoo’s $40. However, Yahoo spent three months trying to find any deal BUT Microsoft, and, in the end, we think Steve Ballmer’s enthusiasm for the deal waned (justifiably, in our opinion).
Since February, moreover, lots of things have changed. To wit:
- Microsoft has lost interest in the deal,
- The online display ad environment has deteriorated significantly, and
- Microsoft’s stock price has dropped 10%.
This last factor alone, in our opinion, makes a deal above $30 unlikely. Steve Ballmer now knows that many Microsoft shareholders and employees hate this deal, and they’ll hate it more if he does it at a price high enough to knock the stock down again. In light of its own stock price, we think it is perfectly reasonable for Microsoft to say “we based our original offer on the conditions at the time, and those conditions have changed. If we were to make the same offer today, it would be at least 10% lower, or, say, $28.” And we don’t see the club Icahn is going to wave to make Microsoft change this.
Which raises the question: Is Carl Icahn going to end up losing a boatload of money on his Yahoo bet? This seems a reasonable possibility.
We estimate that Carl’s cost basis in Yahoo (mostly via options) is about $25. A few weeks ago, he was $120+ million to the good. Now, however, his paper profit is shrinking, and–in our opinion–it could soon disappear altogether.
If Carl loses his proxy fight and Yahoo doesn’t pull a magical Google deal out of the hat, Yahoo’s stock will likely fade toward the low $20s. If, somehow, Carl wins the proxy fight, we think the best Microsoft takeout price he’ll likely be able to negotiate is in the $27-$28 range. If Yahoo and Microsoft agree to a deal at $27.50, Yahoo’s stock will probably trade around $25 now and close in on $27.50 over the course of the year of pre-closing purgatory.
Unless Carl has an impressive Plan B, in other words, we think he’ll either end up making only a modest amount on a transaction that, a couple of months ago, looked like a layup sale at $33–or actually lose money. We would not be surprised, therefore, if Carl soon gave up and started selling.
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