Tuesday, May 20, 2008

Deal or No Deal

Did anyone notice that YHOO is awfully quiet on the latest discussions with MSFT? All the noise and leaks are coming out of MSFT. Only thing new from YHOO was, "Yahoo! has confirmed with Microsoft that it is not interested in pursuing an acquisition of all of Yahoo! at this time." This protects YHOO against the activist shareholders and those filing lawsuits.

I doubt that any of the MSFT proposals that have been leaked so far are being seriously considered by YHOO. All of them seem less attractive than selling the company outright for around ~$37- that YHOO is looking for. I think as Henry mentioned somewhere, all these leaks from MSFT is just a face-saving maneuver and a way to signal to the activist shareholders that it is still interested and would support them at the appropriate time. It is also designed to postpone the nuclear option for the time-being and buy some more time. The nuclear option being YHOO signing up a long term deal with GOOG, shutting out MSFT forever.

By the same reasoning, GOOG and YHOO are not too keen on exercising the nuclear option unless they are forced to, because its effects are unpredictable and it may backfire. It works better as a threat and has deterrence value as has been amply demonstrated. I think they will exercise it closer to the shareholder meeting and only if it looks like the proxy fight has a reasonable chance of succeeding. Until then it will be just some more hot air from MSFT, unless they decide to cave in and bite the YHOO bullet for ~$35+. At some point Ballmer will realize that every-time he takes some action and makes some announcement, MSFT stock drops another 2-3%. He may decide to take the pain in a single-shot and acquire YHOO on the terms that Yang is asking for. The recent comscore numbers for both YHOO and MSFT are alarming, so he must soon feel some sense of urgency.

I doubt that GOOG will resist the transaction if MSFT ends up paying ~50B$. In fact it may covertly encourage it while overtly opposing and delaying the deal consummation, at least until the new president is sworn in.

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