MSFTextrememakeover

Sunday, February 10, 2008

Reprieve, Or Just Haggling On Final Price?

Word over the weekend (from various sources) is that YHOO's Board is set to reject MSFT's bid on Monday:

If true, you have to wonder what YHOO leadership's real intention is here. Could they possibly be even less concerned about their shareholder's welfare than say, our management, and stupid enough to flat out reject an offer this lucrative? I guess it's possible, but they'd better have one hell of a consolation prize waiting behind door #2 for their owners. If it's just a zonk, a massive shareholder lawsuit will soon follow, and the current management and BOD would be well advised to start updating their resumes. If a prize is in the offing, how will it be financed? Outsourcing search ads to GOOG, as has been rumored, doesn't seem sufficient to generate the short-term funds required to pay holders a significant one-time dividend or equivalent. In fact, any hook up with GOOG is going to face a tough time passing regulatory muster.  So will YHOO take on debt to do something like that? Sell a partial ownership stake to someone else? Other? Unclear, but interesting.

Of course, this could be - and mostly likely is - just a negotiation ploy. YHOO's Board may well be resigned to being MSFT's Valentine in the final analysis, but figure they might as well hold out for chocolates and roses in addition to that $44.6B dinner originally offered (now subsequently devalued as the price of MSFT shares has dropped). If that's the case, common sense would suggest dialing down the "they're trying to steal us" rhetoric  - especially in light of a 60% premium to market bid that several pundits have described as "insane", and which MSFT holders liked so much they promptly chopped $40B+ off the company's marketcap.

And what's Ballmer's next move upon a formal rejection? Now that he has opened this veritable Pandora's box, in the process destroying that aforementioned MSFT shareholder value, is he going to simply shut the lid and walk away? Sorry folks, early April Fools' joke? While that's likely best for MSFT holders, certainly short-term, it's not likely to enhance his credibility - and he isn't exactly swimming in an abundance to begin with. Will he choose to turn it upside down and shake it instead, bypassing YHOO management altogether and going directly to shareholders - a true hostile takeover that drags on for months? That'll help the stock price. Not! Or will he try to appease the evil spirits, order up those chocolates and roses (and, at the rumored $40 price, dessert wine, a fur stole, a diamond ring, etc.), and just add it to our tab? Capital Research no doubt had something to say about that one - thank God. But I suspect that Ballmer will still bring the offer back up to the at least the original $31 valuation, and will probably go another 10-15% above that.

As a sanity check - or more accurately insanity check - if he ends up going all the way to $40, the deal would now be worth ~$53.6B. Not counting the additional billions here or there in advisor fees and other miscellaneous transaction costs, that would result in the originally envisioned (and abusively dilutive) "600M" of newly minted MSFT shares swelling to ~938M+ - or almost a 10% overall dilution. And we didn't even get the chocolates, roses and dinner first...

I have a better idea. Let's get someone to see the value in MSFT that Ballmer has kept so well hidden these past 8 years, and offer us a 60% premium. Given Friday's close, that would put us at $45.69 - or just about 20% down from where we were when Ballmer first took over as CEO in '00. Surely someone would like us to be their Valentine? We aren't cheap, but we have redeeming virtues. And we won't be ungrateful and accuse you of trying to "steal" us.

 

Update:

It's official, YHOO has rejected the offer as too low:

(though they did dial down the rhetoric from that used in the weekend's convenient advance leak).

Some numbers and background on what YHOO is really worth courtesy of Henry Blodget:

(The range btw is $21-$26, and that's using optimistic numbers and assumptions. It's also on a standalone basis. As part of MSFT, YHOO's results would enjoy MSFT's multiple. For example, "35X 2009 estimated EPS = $26", would become "16* 2009 estimated EPS = $11.88" using MSFT's current multiple - give or take any "synergies", of course. Recall what I said in an earlier post about an eventual $1-$2/share goodwill write down for MSFT if this deal goes through? Now you see how that could result)

Not surprisingly, MSFT is selling off further on the news. Consensus expectation appears to be that MSFT will make a higher counter offer - at least before trying other more aggressive measures. In other words, dig in - it's going to be a while, and  the stock is going lower before it's done.

 

Update #2:

MSFT officially responds:

("Good" news? Not upping the original offer, despite the subsequent devaluation - to around $29 and change for each share of YHOO. Bad news? Still want the deal. Read: will likely do so eventually)

Also worth a read:

Excerpt:

Concludes Havens: “It’s not a question of whether they will be acquired, but at what price, and how long will it take.”

10 Comments:

  • I liked the option discussed early where we decide to sell MSN to Yahoo. Spin it off, so a merger with Yahoo, give them a cash infusion and walk away (equity stake or ownership of course). That change after this mess might cause Ballmer to get a bump in credibility.

    By Anonymous Anonymous, at 5:34 PM  

  • MSFT acquires Danger, makers of the SideKick cell phone devices?

    http://www.engadget.com/2008/02/11/microsoft-buys-danger-windows-mobile-sidekick-imminent/

    http://gizmodo.com/354998/microsoft-absorbs-sidekick-maker-danger-inc

    By Anonymous Anonymous, at 9:17 AM  

  • I have a better idea. Let's get someone to see the value in MSFT that Ballmer has kept so well hidden these past 8 years, and offer us a 60% premium.

    Perhaps the hidden value is that the new owners could fire Ballmer. Without his big mouth around to tank the stock on a regular basis, it could see some sustained price growth.

    Seriously, at this point, MSFT could probably still be salvaged by a massive overhaul of its management ranks, but in another year or two, I don't know. They've lost too much momentum and talent, and the industry still moves pretty fast. The operational level product leadership has serously underinvested in code quality.

    Or maybe misinvested is a better term. There have been huge bureaucratic quality efforts that did some good, but no where near enough and were soo costly that real quality efforts were starved for resources.

    I'm free of MSFT stock at this point, but I still own real estate in the Greater Microsoft Employment Region. Bad for me...

    By Anonymous Anonymous, at 9:12 AM  

  • Now to make matters worse, incompetence has been rewarded again - Satya Nadella was promoted last week to "Senior VP" as a reward for achieving nothing in MBS (Dynamics) for 3+ years and even less in Search business over the last few months.

    Even if Yahoo is bought without too much acrimony, Nadella & Co will be ready to put the Redmond stamp of continued incompetence and smother any creativity left in current yahoo groups. That's what they did in MBS - Fargo, ND and Vedbek, Denmark understood the business apps market but Redmond guys (Satya Nadella, Hal Howard etc) who had no clue did everything to stop them from building anything of value. All they achieved was build a partner factory - making "yes boss" people into partners and shafting anyone who dared to challenge their incompetence.

    By Anonymous Anonymous, at 6:28 PM  

  • For all of Gates' weaknesses, I'm beginning to think he kept Ballmer in check.

    Microsoft looks to create an Apple-like halo effect across its brands:

    "As we look to the future, we must reinvent our approach to consumer marketing, the pre-sales experience, the way we work collaboratively with our PC partners, and how we communicate our brand and what it stands for. To do this, we will make changes to bring all consumer audience marketing across PSD into a single organization. This will enable us to align marketing resources, eliminate silos, communicate the end-to-end experiences, and better connect with consumers.”

    What about "post-sales customer experience" - lol.

    "...a software engine that delivers the most relevant and social online content experience Nadella said. The key innovation will be around driving user centric content experiences powered by unique editorial voice and deep mining of content/search, usage and social graph."

    Yep, it's that "social online content experience" that has kept Google out ahead.

    Geeze Louise. I could write a book on what is wrong with those two visions.

    Apple's "halo effect" isn't due to marketing. It's because their products work and do what their customers want.

    I'm reminded back in the 80's when the seven sisters followed Exxon into oil shale exploration/processing in Utah/Colorado, each spending billions on a "monkey-see monkey-do" strategy, seemingly oblivious that Exxon had different reasons that wouldn't translate across the board.

    Before Microsoft can benefit from a "halo effect", they're gonna hafta shed the "horns effect", stop fighting their customers and start serving their customers - duh.

    By Anonymous Charles, at 4:07 PM  

  • Before Microsoft can benefit from a "halo effect", they're gonna hafta shed the "horns effect", stop fighting their customers and start serving their customers - duh.

    Dirty little secret - Microsoft's real customers are OEMs and IT departments. It does what those folks want, not what the people who actually end up sitting in front of the computers want.

    If MSFT wants a halo effect, it will need to start selling directly to customers, not to intermediaries. It's possible that XBOX was, among other things, an effort to learn how to do this. RRODs aside, XBOX has been popular with customers, but MSFT has poured so much money into the effort that there's no indication the company has learned how to profitably sell directly to customers.

    By Anonymous Anonymous, at 10:22 AM  

  • Interested news bit about Yahoo upping the severance package in the event of a takeover. Pretty much guarantees that the best and brightest find a way to the door and getting this package at the same time. I know I would.

    By Anonymous Anonymous, at 1:12 PM  

  • Microsoft's real customers are OEMs and IT departments. It does what those folks want, not what the people who actually end up sitting in front of the computers want.

    It's hardly a dirty little secret. It's the elephant in the room Redmond refuses to acknowledge.

    Microsoft perpetually, chronically, inevitably, persistently, confuses channel sales with marketing.

    Channel sales is about getting Dell, HP, etc. and enterprises to sign Microsoft volume contracts.

    Marketing is about planning products that customers want that Microsoft can profitably sell.

    IT departments give MS an earful because their end-users give them an earful. OEMs give MS an earful because their customers give them an earful. There are always numerous buyers in any channel, and arguably each has their customer, but it is the last buyer who is the tail that wags the dog - the buck starts with them.

    It isn't a fast, responsive process, given the intervening layers at OEMs and enterprises between MS and the end-user, but it will prevail in the end.

    Microsoft is intellectually lazy. They believe they can force something in one end of the channel and not care about the consequences at the other end. Now, in reality they end up caring about those consequences, but that is always after the fact, and never preventative at the time they're stuffing the channel.

    Users (including exec's and decision makers) are increasingly fed up. Their companies are investigating non-microsoft trial solutions. Those companies are putting big dollars into funding non-MS "experiments". As those experiments mature, they become vetted product solution alternatives that other companies and retail consumers will buy as well.

    It's a ripple effect, the Longhorn reset was the stone, and the waves are beginning to lap on distant shores.

    By Anonymous Charles, at 11:27 PM  

  • Yeah, sorry... I... am trying to help Microsoft. :(

    By Blogger l0ckergn0me, at 9:20 PM  

  • Perhaps the hidden value is that the new owners could fire Ballmer. Without his big mouth around to tank the stock on a regular basis, it could see some sustained price growth.

    By Anonymous Soccer, at 6:16 PM  

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