Legg Mason owns 80 million shares of Yahoo and is the company’s second-largest shareholder. Portfolio manager Bill Miller has met with Microsoft’s Steve Ballmer and talked with Jerry Yang since the offer was made. His key conclusions, expressed in a letter to fundholders:
- Microsoft needs to raise its offer.
- Yahoo needs to accept it.
Bill is obviously talking up his book here, but as Yahoo’s second largest shareholder he has significant influence. His view reinforces our conviction that a deal will be struck in the low- to mid-$30s in relatively short order.
YHOO’s Board has pledged to give the offer careful consideration and to do what they believe will deliver the most long-term value to YHOO owners. That is the right message, and we are waiting to hear their views as they develop. That said, we think it will be hard for YHOO to come up with alternatives that deliver more value than MSFT will ultimately be willing to pay.
We think this deal is a strategic imperative for MSFT, and that YHOO is in a tough spot if it wishes to remain independent. It has been reported that MSFT has been discussing a combination with YHOO for well over a year, and that it had been prepared to pay over $40 per share previously. We have no way of knowing whether those reports are accurate or not.
Our own valuation work puts the value of YHOO in the range of those reported numbers, though, and we think MSFT will need to enhance its offer if it wants to complete a deal. YHOO shares were recently trading at a four-year low, and the stock averaged above the current offer price for all of 2004.
YHOO is a uniquely valuable asset, and we expect MSFT will do what it takes to acquire it.
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