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