Thursday, May 15, 2008

Icahn's intentions


Looks like your comment was after MSFT walked and was more of an explanation of what happened (a posteriori). If you look at the date of my comment, it was before MSFT walked (a priori). YHOO holding value and rising was an unexpected event for the street, with most folks expecting ~$20 price on YHOO. I had expected around $24 and rising from there, which it did.

In any case, congrats on making some $$ on it. I made some $ as well but didn't hold YHOO opts. till Mr. Icahn showed up, so left some for him :-).

If you look at the story in my comment earlier, I totally agree with you that Icahn is very smart. My claim is that he doesn't have any affinity to YHOO or MSFT. He'll just try to extract maximum value from this deal regardless of whether MSFT is still interested or not. In the process if YHOO loses value so be it.

If MSFT doesn't come back at around ~$35, I doubt that Jerry will agree to a deal. A protracted proxy fight is in no one's interest because then YHOO becomes a fast depreciating asset. But both MSFT and Jerry are still quite far in terms of expectations. So protracted proxy fight is likely. If Jerry feels threatened by this at some point he would sign deal with GOOG and try to divest YHOO's asian assets. He has nothing to lose by following that path. The short term activist shareholders will still make money, but it would be a big strategic loss for MSFT.

I think comparison of GM and YHOO is not fair, because YHOO is all about people and technology unlike GM. Perhaps a comparison with BEA and ORCL is more reasonable. In that case ORCL ended up paying a lot more for BEA after Icahn got involved. I'm sure MSFT would have to pay more in this case as well, because of Icahn's involvement. Most commentators at this point believe that MSFT is in a better negotiating position and should lower their offer from $33/share. I don't agree with this view.

Rav said:
Guys, remember the story of two cats and a monkey? In this case YHOO and MSFT are the two cats trying to negotiate an impossible deal. Sniffing an opportunity, Mr. Icahn has offered to distribute the goods in a fair manner. You know how the story ends.

Mr. Icahn will extract all the value in the deal and leave a dead YHOO for MSFT to acquire. Remember that MSFT could have done the proxy fight itself, but chose not to do it because they want an alive and friendly YHOO, not a dead and hostile YHOO. Mr. Icahn is just throwing a monkey wrench which will make the deal even more expensive for MSFT and lead to loss of value on the YHOO side.

Note that YHOO is trading higher than the weekend before the deal looked like a sure thing. This implies that the market has higher expectations than what MSFT was offering back then. People are betting that either MSFT takes the bait at ~$35/share or YHOO quickly signs a long-term deal with GOOG to stay independent.

Btw, I had predicted some of this in:
"Rav: [E]veryone is assuming that if MSFT walks, Yahoo goes under 20, with no opinions to the contrary. They don’t seem to realize that Yahoo shares now have MSFT put (similar to the Greenspan put). No one will believe that MSFT is going to walk for real and for ever. YHOO may go down 2-3 bucks, but then will attract lot of new stock buyers, because MSFT is eventually going to come back."

Now YHOO has a Icahn put in addition to MSFT put, and guess who is gonna pay the premium for those puts - MSFT

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