Thursday, June 12, 2008

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.

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