Wednesday, July 9, 2008

Price of YHOO

As I said in earlier comments - MSFT doesn't have any other move in this game of chess. Buying YHOO is the only move if they have to survive and have some semblance of competition against GOOG. They tried to go at it alone for a long time with nothing to show in terms of results except for lost billions.

Also, Yang is not desperate to sell. By its conduct throughout this process, MSFT has amply demonstrated that it is the desperate party. If the deal happens then the price won't be determined by how much MSFT can afford to pay. It would be determined by who the desperate party is and how desperate that party is. A low-price deal can happen only if Yang, Icahn and Ballmer get together and come up with some kind of compromise deal before Aug1. What are the chances of that happening? If the proxy fight gets to Aug1, then Yang will most likely win it and then the price that MSFT will have to pay for YHOO will go back to the $30-35 range.

I don't agree with the last line in your article. The stock price is determined by the bid and ask prices. If the spread is large then the less desperate party gets to decide the ultimate price. Post Aug1, with a new one year lease Yang will have a stronger hand and MSFT will be the even more desperate.

For example, when you go to buy a car, the price is not determined by what the buyer can afford to pay. Since MSFT can't afford to buy all of YHOO, without significant dilution to its stock, they are also considering leasing options - like the partial deal. All the factors like the scarcity value of YHOO assets, nuisance value of YHOO-GOOG deal for MSFT, value of asian assets, future growth prospects for MSFT in a world dominated by GOOG etc. will play a role in determining the price that MSFT will end up paying for YHOO.

Bill Gates is the smart one here. He is getting out just in the nick of time, leaving Ballmer to manage and hold together the crumbling empire.

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