Does Microsoft really 'undervalue' Yahoo?
In a new round of public letters, Microsoft CEO Steve Ballmer and Yahoo CEO Jerry Yang tussled about whether the software power is offering too much or too little for the Internet company. So who's right?
There's no simple answer here. It's tricky math, especially given overall declines in Internet stocks and the fact that Yahoo's worth is different depending on whether you consider it a standalone company or a part of Microsoft, which said it expects "at least $1 billion in annual synergy" from an acquisition.
But we surveyed a number of analysts--call it the wisdom of the equity analyst crowd. Opinions varied, but we didn't run into anyone who thought Yahoo could expect a dramatically higher price.
For background, Ballmer threatened Saturday that if a friendly deal isn't wrapped up within three weeks, the company will launch a proxy contest to try to elect its own board of directors. And if it goes that route, Yahoo should expect a lower offer, he said.
Microsoft CEO Steve Ballmer
(Credit: CNET Networks)"The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal," Ballmer said in his letter to Yahoo.
Yang and Yahoo Chairman Roy Bostock responded Monday that Microsoft's offer is too low, though: "Our position is simply that any transaction must be at a value that fully reflects the value of Yahoo, including any strategic benefits to Microsoft, and on terms that provide certainty to our stockholders."
Microsoft announced its desire to acquire Yahoo in February, in what would have been a cash-and-stock deal that amounted to $31 a share.
Yahoo's shares have increased significantly since the deal was announced, from $19.18 beforehand to $27.70 Monday. Microsoft's have dropped from $32.60 before the proposal was announced to a close of $29.16 on Monday; Yang and Bostock observed, "The value of your proposal today is significantly lower than it was when you made your initial proposal."
Jerry Yang, Yahoo's CEO
(Credit: Yahoo)Analysts vary in their opinions about the price, with some calling $31 per share a fair deal and others expecting Microsoft to sweeten the deal.
"We think reaching a mutual agreement would be the best way for Yahoo to potentially extract a higher bid," UBS analyst Benjamin Schachter said in a report. And Microsoft might well be willing, he added. "We believe Microsoft's negotiation tactics are very similar to Oracle's in its quest to acquire PeopleSoft, and as such believe a slightly higher bid could still be in the cards."
Oracle's 18-month effort to acquire PeopleSoft began on a very acrimonious note when compared with the Microsoft-Yahoo deal, but ultimately Oracle's acquisition settled after its price rose sufficiently high. Oracle's opening offer of $16 per share was significantly less than the eventual price of $26.50 per share.
Referring to Microsoft's three-week deadline, Schachter said, "We think Yahoo has no choice but to enter into a deal within this time frame, as there are no other viable suitors in our view."
And Yahoo's position is losing strength because of declines overall in its category of companies, Steve Weinstein of Pacific Crest Securities said in an interview.
Microsoft's big bid for Yahoo
"When Microsoft made its bid for Yahoo, the share price was around $20," Weinstein said. With Yahoo's category declining overall, "it's a difficult argument to make that Microsoft's offer is unfair."
Derek Brown of Cantor Fitzgerald already sees $31 per share as a good deal. "When the deal was originally announced, we maintained a hold rating but raised the price target to $31 per share, believing that was a very healthy premium to where Yahoo had been trading and given what appeared to be deteriorating fundamentals in Yahoo's business," Brown said.
Brown said he doesn't know what Yahoo's "full value" is, though. "It would be interesting to see the measurements or comparables they (Yahoo) are using to determine that."
Mark Mahaney, a financial analyst at Smith Barney Citigroup, also said it's hard to value Yahoo definitively, or even whether to assess its value as a standalone company or as a part of Microsoft. But it's possible to estimate value based on financial results of other companies that recently have been sold--Aquantive, Digitas, and 24/7 Media, with Microsoft itself buying the first.
"There's a reasonable valuation support base for Yahoo being sold at between $31 and $34 (per share) by looking at what other Internet advertising companies have been bought for," Mahaney said.
Scott Kessler, equity analyst at Standard and Poor's, called $31 "a pretty fair valuation," based on how Yahoo's stock price compares to its earnings. "The reality is this is a difficult situation for Yahoo. Clearly Yahoo has had its share of difficulties over the last several quarters."
News.com's Elinor Mills and Stefanie Olsen contributed to this report.
Stephen Shankland writes about a wide range of technology and products, but has a particular focus on browsers and digital photography. He joined CNET News in 1998 and since then also has covered Google, Yahoo, servers, supercomputing, Linux and open-source software, and science. E-mail Stephen, or follow him on Twitter at http://www.twitter.com/stshank. 
1. A smart guy like Ballmer is not going to offer what he thinks a company is worth. He's going to come in low to see if he can get that price. It's a given that he is willing to pay more.
2. Then he'll do everything in his power to create the fear, uncertainty, and doubt to make it seem like the sky is falling if the company does not accept the offer. And, he'll do everything to make the company believe they are no longer worth as much as the initial low offer.
3. He'll put enough fear into the existing board and shareholders so that if they feel they can get a little bit more money, then the deal would be worth doing -- that they'll somehow be outsmarting the buyer.
4. Steve offers them a bit more (either less than or equal to the price he originally thought the company is worth) and the deal will be accepted. Say what you want about Microsoft and Windows... but Ballmer is as sly as fox when it comes to this stuff.
Want to know what's going to happen? Wait until Yahoo announces their first quarter earnings. You'll see Microsoft raise their offer. Yahoo will accept and the deal will be done.
There... no need to listen to all of these analysts go on and on about this. It's so blatantly obvious what's transpiring here.
yahoo instead of google? ask around. I doubt you'd even find ONE.
:)
Your argument does not really hold water.
I think Yahoo is confused about the Future means they want to get the Advertisement Opportunity without selling the company. But Microsoft wants to expand or average its Business that it has lost, because of Open-Source, Google or Whatever.
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They have more experience than just about anyone in the problems of spam, bots, and other annoyances.
They have a partnership with AT&T that could monitize in a very big way except for ATT's short sighted management.
Yahoo has some of the best programming brains in the world... many of whom will quit the minute MS takes over.
Microsoft has already proven they cannot operate a community, let's hope yahoo's management sticks to their guns. This is an pure anticompetitive move to keep Yahoo's web applications from diluting MS offerings.
MS is saying "we need you to compete because we can't make it on our own, we are however your superior and our stock is part of a deal that you should like even though the market seems to be movig it down right now".
Yahoo is saying "We don't need you to make it on our own, we will be just fine, but if you are going to take us over anyway you may want to anti up some real value".
- Jerry has "Horse Teeth"
- by RTFM April 9, 2008 8:06 AM PDT
- Jeeze if I made his money I would at least do something about those corn huskers. Yeah Yeah stop the hating...
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