Tuesday, June 24, 2008

This is great!

pathetic? Are you kidding? This is great!!...

1. MSFT talks to YHOO about acquisition.
YHOO goes up and MSFT tanks...
2. MSFT walks.
YHOO goes down and MSFT stuck in neutral.
3. Go back to step1 for next iteration.

While MSFT keeps playing those games with YHOO the end result...
- YHOO gets weaker in the market, but still stays significantly higher than its pre-MSFT-bid level of $19
- MSFT loses about 5-10% on every iteration above. Its already down from about $32.5 pre-bid to about $27.5. There's another iteration in progress and the walksters are trembling.
- GOOG improves its market share v/s YHOO+MSFT and laughs its way to the bank. It also has YHOO trapped in a deal where it fills GOOG's coffers one way or the other..

This is great if you are GOOG long, MSFT short and can time the waves on YHOO.

Monday, June 16, 2008

More predictions

Guys, I'm out of town so won't be able to spend too much time on this, although I find this topic very interesting. Meanwhile, I'll just refer you to my blogpost on June 6th. This was written before any of the recent events. I'm glad that its turning out exactly as I expected so far. I had also predicted that YHOO will settle in the range $21-23, at which point it becomes a buy. I put my money @ 22.71. If things work out as I expect, then YHOO will settle around $25 by the time the shareholder meeting is done. Then in six months MSFT will end up buying YHOO at $34-35, out of desperation. Standard disclaimer: outlook depends on Mr. market remaining normal...

So enjoy..


@Alex Schleber

I'm glad that you enjoyed my "tongue-in-cheek" post on what APPL should do to MSFT. For a moment I thought the readers of this blog lost their sense of humor along with the $$ bet on a YHOO acquisition..

Friday, June 13, 2008

Here's an idea for AAPL to consider

Apple should make a bid for MSFT's (smartphone + OS + mp3 player) assets for 5B$ cash. This should include all OS assets including: Code, people, servers, data centers, patents, customer accounts, knowledge-base, buildings in redmond etc.

Combination of cost savings and revenue boost would drive at least $5 billion in incremental operating income to MSFT per year. Apple can then kill all flops like zune, vista etc. As part of this deal Apple should buy 16% of MSFT, using its high PE stock, hoping that some of the PE rubs off on MSFT stock. MSFT should discontinue all its investments in zune+xbox+OS as part of this deal. They can then focus all their energy in making Office work better as the primary goal for the new lean and mean organization.

The combination of the OS, phone and music player assets would unlock new R&D innovation, eliminate redundant engineering efforts and allow for greater scale in serving customers.

Taken together, I believe this proposal would create total value for MSFT’s shareholders in excess of $45 per share. Heck, just a single presentation by Steve Jobs could do this. Btw, its just an estimate, so don't hold me to it.

If MSFT rejects this unsolicited deal from AAPL, pundits can then start analyzing, how crazy it is for MSFT to have rejected this deal.

Difference between MSFT and GOOG

Not content with spinning to the rest of the world, now MSFT has resorted to spinning to its own employees.

Read the following two articles that came out today and you'll know how MSFT strategy compares to GOOG. Which strategy do you think would be the winner?



An analogy

The bottomline is this: MSFT wants to milk the YHOO cows without owning them (I believe analogy is Icahn's). GOOG wants to provide YHOO with a gadget that improves the yield of its cows. YHOO is free to use it on whichever cows they choose and on whatever days it suits, as long as GOOG gets a small cut, everytime they use this gadget. GOOG is very clear that they are not trying to own the cows or milk the cows.

Which one is better: Microhoo or GooHoo?

I find it hard to believe that MSFT can monetize better and generate more cost savings than GOOG. The comparison that you are doing is not apples to apples and somewhat dishonest. If you really want to compare then use the same assumptions in both cases.

Assume that _ALL_ queries are outsourced to GOOG or MSFT and YHOO shuts down its internal search related development and support. In that scenerio, I'm sure the boost in YHOO operating income would be significantly higher with the GOOG deal. The $250-$450M they are talking about is based on long-tail which is hard for YHOO to monetize currently, and I'm sure would be hard for MSFT as well.

The way YHOO-GOOG deal is currently structured, eventually they would have flexibility to move towards the goal of full outsourcing, once all the regulatory hurdles are out of the way. So over the long run, GOOG deal would be less risky and a better choice compared to MSFT deal, in terms of monetizing the search share that YHOO holds.

Ring out MSFT, Ring in GOOG

M wants Y. Always wanted Y from last couple of years. But M never wanted to pay a fair price and just bully their way in. M also wanted Doubleclick. But it didn't want to pay. Let's just say that M got Doubleclicked again. Now I won't be surprised if they get pissed off at another loss to GOOG and blow their money on a fad like facebook (just as they did with Aquantive, after they lost Doubleclick). M should realize that its not the nineties anymore and their empire is in decline.

With Gates out and a stock that's been floundering for a decade, MSFT is like a headless chicken running around scared, without clear strategy or goal. All they can hope now is that their buddies in the govt can slow down the GOOG juggernaut. But GOOG has already played this game and played it well. Look at their success in getting DCLK approved and also the wireless spectrum opened up. Look out for more FUD and spin from MSFT. For example:

I think its time for MSFT longs to wake up and smell the coffee. Use this short term pop to get out from the past (MSFT) and get into the future (GooHoo). This isn't really about Y. Its more about the war between G and M, and there is still time to be on the winning team.

Thursday, June 12, 2008

What's up with MSFT?

@Victor - I don't think Yang said no to $33. Yang countered $33 by $37 and was probably expecting Ballmer to come back at $35. In fact Ballmer pulled a fast one on Yang and immediately pretended to walk out of the deal. He never tried to negotiate beyond the verbal offer of $33 without any details. You can't call this a mistake because even other big shareholders like Miller were expecting around ~$35 as a reward for holding YHOO for several years. MSFT played the same kind of trick again this weekend. They don't seem to have a sense of urgency or a sense of direction. In the process both MSFT and YHOO are getting weaker and GOOG is getting stronger every day. Not that there is anything wrong with it. :-)

Remember Terry Semel tried to buy facebook for 1B$ and then changed the price to 800M$ at the last moment. MSFT is trying to do the same with YHOO. But they fail to realize that Yang is not desperate and the GOOG boys are his buddies. So he won't stab them in the back, unless the MSFT offer is really really good...

Ballmer Balked and Walked!


Very good observation. As Yang said earlier, MSFT didn't specify clearly what they mean by $33 offer. I'm sure YHOO BOD offered to agree to $33 last weekend, with the valuation guarantees. MSFT must have balked at those and walked. This would be very useful for YHOO BOD, when they defend their actions in court. They can just say, "Ballmer Balked and Walked"!!

Rationale for buying YHOO today

Victor, I agree with you regarding GOOG. You'll see that I'm fan of GOOG as well, if you follow my posts.

My YHOO position that I just started today is at $22.71, and is small relative to GOOG. I think its a good hedge against GOOG. If MSFT takes out YHOO close to ~$33, it will cover the potential negative effect on GOOG. If they don't then I have Icahn working on creating value for my YHOO shares. Note that MSFT still has some partial offer that they believe is worth more than ~$33 outstanding for YHOO.

Btw, does anyone know if my shares bought today are eligible for voting in the YHOO shareholder meeting?

MSFT still interested?

Take that - CNBC says MSFT still interested in partial transaction, not in acquiring all of YHOO. Hahaha... no respite for walksters. The millstone is still around MSFT, and its stock is still at ~$28, much lower than ~$32 when this drama started with MSFT's bid.

Can someone tell me what's new here?
1. MSFT still interested in partial transaction, not in full deal. This is exactly what Ballmer has been saying since the AllThingsD conference.
2. YHOO has said several times, MSFT is not interested in full acquisition.

Only thing new I see is that YHOO is closer to a GOOG deal than ever, and significantly cheaper than yesterday.

Long live GOOG-YHOO monopoly

Just bought some YHOO at 22.71$ to go with my GOOG. Guys, wish me luck!

Long live the goog-yhoo monopoly!!!


GOOG + YAHOO ? Really??

This should make it a lot more interesting, if it really happens


Ready for the proxy fight?

@xfactor, @LFerguson, @jon

I don't understand your comments primarily indicating that I'm cheerleading YHOO. I think MSFT is clearly the loser here, which is the gist of my comment, which you seem to have missed. Its stock is down from ~$33 to about ~$27 since they announced the deal. YHOO stock is up from $19 prior to deal announcement to about $26 today. Also it was close to ~$30 in the interim. So those holding YHOO stock had plenty of opportunity to sell close to ~$30, which is better than any offer that MSFT made in the interim. Of course, this is taking into account the delay in regulatory approval etc. For argument's sake, if we assume that Yang had accepted a 50% cash / 50% stock deal from MSFT at $33. The stock still would have traded close to $30 or could have be even lower if MSFT stock crashed even more due do dilution. And its not clear if Ballmer would have offered that deal, since he didn't specify the cash/stock split when he offered $33. So Yang did well to reject the deal without any valuation guarantees from MSFT.

@The illusionist

I agree that its a "calculated risk" that Icahn is taking. He has long term option positions (nov 2010) and he can afford to wait. If anyone believes that he wouldn't want to wait and would be out soon, why would he buy long-term options? He indicated on CNBC that he is prepared to wait even 6 months if required.

I think he believes that the downside in YHOO is limited due to two factors
1. MSFT desperately needs to do something about its rapidly dwindling search share. Its cash cows are soon going to be eaten by GOOG, AAPL, ADBE etc. The only move that MSFT has is to buy YHOO, to get the scale to compete with GOOG. Even Ballmer said that in this "walk" letter. And I'm using "compete" in a loose sense, because GOOG is like a freight train running at top-speed.
2. GOOG won't let MSFT acquire YHOO for cheap. If you look at the events so far, anytime MSFT got close to buying YHOO for its bid price, "persons close to the situation" come out of the closet and talk about an imminent search outsourcing deal between GOOG and YHOO.

If the deal happens, it won't be based on how much MSFT can afford to pay without tanking its stock, but it will be based on how desperate MSFT is to have some semblance of competition with GOOG. This is really bad news for MSFT stock, some of which is already reflected. If Yang wins the proxy fight, there is nothing that would force him to negotiate in MSFT' favor. So the price-tag would go up and not down as most of the pundits expect.

Based on my reasoning, I believe that GOOG will do well, MSFT will keep going down and YHOO will remain neutral until the proxy fight, relative to the market. In the proxy fight I believe that Yang will win with 1-2 seats conceded to Icahn. If YHOO stock tanks to $21-23 range at that point, it would be a good time to buy YHOO, just as it was after MSFT walked. But its unlikely in my opinion.

Is MSFT still interested in YHOO?

Let's look at those statements one at a time:
* Microsoft has lost interest in the deal -
MSFT would like everyone to believe that. But remember that they also keep saying that all options are on the table and they reserve a right to go for a full acquisition of YHOO at a future date. The way its stock has been trading lately, seems like nobody except for Henry believes that MSFT has really lost interest. If MSFT had really lost interest, they would come out with a categorical statement that they are no longer interested in any kind of deal with YHOO and that would support its stock.

* The online display ad environment has deteriorated significantly - This is all the more reason for MSFT to salvage whatever is left of the search market. Only way they can do it is to acquire YHOO.

* Microsoft's stock price has dropped 10% - Well considering its precarious position in its bread and butter markets (office / OS) which would soon go the way of dodo or dinosaur (pick your metaphor), and lack of traction in new emerging markets like online, music, mobile, gaming etc, MSFT doesn't have much of a choice. It can go down without a fight dishonorably or try to fight it out and go down honorably. This is the decision that Ballmer and Gates have to make. I think they will hesitate and when all is said and done will decide to put up a fight. If they end up buying YHOO, MSFT stock will go down because of the high price paid and if they don't buy YHOO, it will still go down because the stock-holders would want to jump out of a shrinking enterprise. Icahn is definitely betting on MSFT's weak hand here.

My yesterday's comment on Icahn's thought process is at:
I think Icahn will come out a winner in this. He will probably get 1 or 2 seats on the board. At that point he will make the YHOO stock acquistion more expensive than the $33 MSFT was offering or if MSFT dithers, put the "goog-deal" gun to its head, which would be the worst nightmare coming true for MSFT.

Everyday that MSFT stock drops, Yang's decision to reject MSFT's low-ball stock swap deal, looks that much smarter. I believe the pundits give lot more credit to Ballmer compared to Yang. But the stock market has showed who the winner is and who the loser is in this saga.

Wednesday, June 11, 2008

What Icahn really wants

If Icahn wins at least 5 seats on BOD, the severance package is triggered. Current YHOO board can't change this even if they want to, the way this package has been structured. This has been public knowledge since the YHOO filing on June 2nd. I guess the media is just waking up, after YHOO reiterated this in their employee Q&A.

I'm pretty sure Icahn was aware of this before getting into the proxy fight. So I don't agree that he would back out and start selling because of this reason.

Icahn is quite aware that MSFT needs YHOO desperately and willing to bet on it. The latest hitwise numbers show that MSFT is down to ~5% of search market and approaching ASK.com in terms of share. The rate at which MSFT search share is going down and looking at its trajectory, it doesn't seem like ~0% is too far from here. They need to do something and desperate times call for desperate measures.

Icahn's options are dated ~nov2010. So I don't think he has an urgencey to sell out and he indicated on CNBC that he is willing to wait it out. Sooner or later MSFT has to come back and make an offer that YHOO can't refuse. Since its almost impossible for Icahn to win, and may not be in his own best interest due to the triggering of severance package, I think he will negotiate with YHOO board to get couple of seats (1 or 2). He might even win those without having to negotiate with YHOO board. This will give him enough leverage to force a negotiation with MSFT in good faith or seriously explore other deals to improve YHOO stock price.

Also after the proxy fight, current YHOO board will be in a better negotiating position, because their board seats would be secure for a year. This would mean that MSFT might end up having to pay ~$35/share with substantial valuation guarantees. What this does to MSFT stock is anybody's guess, but ~$25 is not out of question.

Friday, June 6, 2008

Icahn playing good cop / bad cop ?

Yesterday I said, "Also both Yang and Icahn, their public spat notwithstanding, seem to be on the same team in terms of objective - selling to MSFT in the mid-thirties, with valuation guarantee". I think today's letter from Icahn confirms this. It looks so much like a good cop / bad cop strategy.

YHOO is the bad cop, and its terms for MSFT deal are:
1. ~$37 negotiable, which means ~$35 with real valuation guarantees. They also have a severance package which is practically comparable to MSFT's offer of $1.5B in terms of cost, although Icahn unnecessarily makes a big deal out of it. No YHOO employee would vote for Icahn, if he keeps doing that, no matter how pissed they are with Yang.

Icahn is the good cop, and his terms for MSFT deal are:
1. ~$34.375, with a real valuation guarantee of ~$33 (note his statement on alternative deals with MSFT). He would like to take off the YHOO severance package, in order to entice MSFT to sign a deal and also allow it flexibility to design the package.

MSFT offer was about $33 with perhaps a valuation guarantee of ~$31 in case of a friendly deal. Considering the beating that its stock has taken since the announcement of the deal, anything more would be detrimental to its stock. I don't think its too concerned about the YHOO severance plan, since its plan was comparable and it is interested in retaining the employees. I didn't see Ballmer making a big deal of YHOO's plan in his letter when he walked.

Also Icahn is talking about just reverting Yang to the "chief Yahoo" role instead of firing him. The conciliatory tone from him indicates that he may be willing to negotiate with Yahoo to get 1 or 2 board positions and back off from the proxy contest. Even with one director, Icahn can facilitate a deal with MSFT by acting as a mediator and preventing any "shenanigans".

Most likely outcome: Icahn gets a board seat, MSFT waits till its stock improves to make any "full acuisition" offer, meanwhile YHOO and MSFT keep talking about "alternative offers". At some point if YHOO stock tanks too much, it signs up with GOOG, with support from Icahn and structure the deal in a way that it doesn't preclude a deal with MSFT.

Thursday, June 5, 2008

What Icahn may try to do

Henry, have you considered the possibility that Icahn may negotiate with Yang to have one or two of his guys on the board thereby obviating the need for a proxy fight? Seems like Icahn is in touch with Yahoo based on his comments yesterday and this sounds like an amicable solution instead of a nasty proxy fight. Also both Yang and Icahn, their public spat notwithstanding, seem to be on the same team in terms of objective - selling to MSFT in the mid-thirties, with valuation guarantee. Both seem to understand MSFT's desperate need for YHOO. Icahn emphasized this as one of the big reasons that he got involved.

Can Icahn win?

Thanks! Articulated very well what I have been trying to convey. There is no way for a rational YHOO shareholder to vote for Carl Icahn - unless MSFT categorically comes out in his support and puts an offer conditional on Icahn taking control of the board. That is highly unlikely considering that Ballmer just said Icahn is acting independently without support from MSFT.

Going one step futher, I believe that Icahn won't lose $$ even if he loses the proxy fight. The reason is that MSFT will still end up buying YHOO at some point in future, if not now then after a few months. If Icahn gets couple of his directors on YHOO board, then they can facilitate the transaction. The price-tag will go up once Yang wins the proxy battle. Also at that point he can easily bid up GOOG against MSFT for its search business, because he won't have to be afraid of losing his seat. A deal at a higher price may be acceptable to all parties, because MSFT would be even more desperate, YHOO and Icahn would want to cash out at a good price and GOOG would have achieved its objective of making the transaction expensive for MSFT and then putting it through the regulatory purgatory.

Wednesday, June 4, 2008

Icahn's dilemma


Looks like finally someone in MSM has realized what Icahn's letter is all about. I have been trying to convey this in my comments during the last couple of days. Let me rephrase one more time:

Icahn can't win support from big shareholders for his slate unless he can get current YHOO BOD to rescind the newly added change in control, because if he wins a majority in the proxy fight, the change in control provisions get triggered, and no right-thinking big shareholder would like that. That's absolute worst case for shareholders because even if Icahn wins, there is no guarantee that MSFT would come back with an offer in mid-thirties that Icahn is looking for and there would be liability associated with the change in control.

What are the chances of current board rescinding the change in control provisions? Will the current board voluntarily make it easy for Icahn to win the proxy fight? That's the whole point of adding those new terms and conditions. As per these articles, some lawyers argue that at this point YHOO board can't voluntarily rescind those provisions, even if it wanted to.

So its quite possible that Icahn will have to take this to the court or just give up on taking control of YHOO board.

How YHOO may respond to Icahn's letter

Henry, as I mentioned earlier, the severance agreement or the poison pill, whatever we call it, applies to all full-time employees in YHOO, not just the top executives. Also from the YHOO sec filing yesterday, this poison pill would get triggered even if Icahn takes control of the board (i.e >=5 board members). So it would be difficult for Icahn to rally support for his slate, with the "change in control" provisions that guarantee significant benefits to _ALL_ fulltime employees of YHOO. MSM seems to miss this point.

Icahn's letter sounds like a ploy to get rid of this change in control provision, so that its easier for him to rally support for a proxy fight. I can't imagine big shareholders supporting Icahn's slate unless the new change in control provisions are taken out by the current YHOO BOD. Based on the history so far, its going to be an uphill battle for Icahn trying to get YHOO BOD to take off the provisions without a stronger and well-defined offer from MSFT. MSFT could offer a better offer conditional on YHOO taking off those provisions. But considering the beating its stock has taken so far, this is very unlikely.

YHOO can respond to Icahn letter saying that they are just trying to retain and attract employees with these new change in control provisions - considering that MSFT's offer has caused significant uncertainty as to the future direction of the company.

From YHOO's filing: "The Change in Control Severance Plans are designed, in light of the uncertainty caused by the Microsoft proposal, to help retain the Company’s employees, maintain a stable work environment and provide certain economic benefits to the employees in the event their employment is actually or constructively terminated in connection with a change in control of the Company."

Icahn - fan of James Bond movies

Icahn's letter to YHOO today. Very interesting to read. Especially the part dealing with James Bond...


Seems like Icahn is pressuring YHOO board to take off the poison pill.

Tuesday, June 3, 2008

Heading to the Delaware Court?

Here is a nugget from YHOO's sec filing today. If I'm interpreting this correctly, then YHOO shareholders, especially the big ones, won't dare to vote for Icahn slate - because if Icahn wins a majority, it may trigger the poison pill automatically. Anyone else would like to weigh in?

I see this heading to a Delaware court one way or the other.


"As previously noted, the Icahn Entities have provided notice that they intend to nominate their own slate of ten (10) nominees for election as directors at the annual meeting. Under the Change in Control Severance Plans, a change in control is deemed to have occurred if the members of the Board of Directors as of February 12, 2008 (and any new directors whose appointment, election or nomination to the Board of Directors was approved or recommended by a vote of at least two-thirds of the directors then in office who were either directors on February 12, 2008 or whose appointment, election or nomination for election was previously so approved or recommended) cease for any reason to constitute a majority of the Board of Directors. If five or more of the Icahn Nominees are elected to the Board of Directors at the annual meeting, a change in control will be deemed to have occurred for purposes of the Change in Control Severance Plans."

Icahn's Public Statement on Yahoo today

I believe YHOO BOD will announce a deal with GOOG after today's board meeting (if there is one). I'm sure during all the recent discussions with MSFT, including the one in the golf cart, they may have offered other low-ball offers and ways of breaking up YHOO, which won't be acceptable to YHOO. MSFT has made amply clear that they are not interested in full acquisition at this time. Their stock in tanksterville confirms that even if they want to acquire YHOO completely, there is no reasonable way that their stock can support such a deal. The key detail in Icahn's announcement today is that now he is convinced as well that there is no quick deal with MSFT acquiring YHOO completely as he was hoping for. He must be tracking MSFT stock with the same intensity as his YHOO holdings to have reached this conclusion.

Since the full deal with MSFT is unlikely and NOBODY, including the activist shareholders in YHOO, other than MSFT, is interested in a partial deal, what are the options? Only alternative for YHOO board is to sign a deal with GOOG and hope to win the proxy fight based on the results of that deal.

Monday, June 2, 2008

The equation


My theory is that GOOG and MSFT will approach each other in market cap within 6-8 months. So watch this equation (9.31*MSFT-0.313*GOOG) B$.

My rationale

@Oli Burgess - If you heard bill gates at the allthingd, he sounded like a very risk-averse guy. If you look at MSFT history they do well only in the risk-free returns kind of situations (like monopoly situations, where the risk of failure is extremely low). They have never made a huge acquisition bet (relative to their market cap) unlike say oracle or cisco, which are acquisition driven companies. If you really believe that deal with MSFT is close, can you propose the stock price that MSFT would offer and the cash/stock split? When you do this, also think about the reaction of MSFT stock to the news and the probability of YHOO accepting that deal. With the current stock prices and the recent public statement from MSFT and YHOO, the deal seems even more unlikely, because MSFT stock won't be able to support anything close to what YHOO is looking for, but who knows....

@Steve Baldwin - I'm surprised at your surprise. If you look at the YHOO chart in the time period 2005 to early 2006, it was always over $30. So anyone who got options during that period won't make anything with the proposed MSFT offer. Most folks at YHOO including the employees must be hoping for a deal in $35-40 to really make anything significant. If the merger doesn't do this for them, they have a better shot staying independent and hoping for better days. Of course the stock holders who bought recently for quick gains, would see this in a different light. I doubt if the longer term holders like Bill Miller would be happy if the deal gets done ~$30, with no significant cash component, because YHOO has been mostly trading in the $30-40 range during the last few years, before it dropped in the $20-30 range.

What is the stock market saying today?

What the stock market seems to be saying is that MSFT has lost its opportunity to make a deal. Its stock is at ~$27.5. At this point if they announce any kind of deal to acquire yahoo, regardless of the price and value guarantees, MSFT stock could very well go to ~$25. I doubt if Gates would approve such a deal. Yahoo is also at about ~$26. Look for YHOO to announce a deal with GOOG soon to support its stock and pacify the activist shareholders.

Last time I mentioned this - the delta between GOOG and MSFT was about $90B. Today its about $77B. Look for this to fall fast with the next 6-8 months.