Monday, July 14, 2008

Three blind men and an Elephant

I was going to raise the same point as Peter above. It sounds like MSFT misread the impact of their latest maneuver. After reading all the negative things in the press and looking at the tepid response from the YHOO shareholders who are soon going to vote, I think MSFT decided to back-pedal and soften their tone. So now they are trying to put a spin on the turn of events. We get statements out of MSFT like - it was not a joint proposal, it was just a beginning of negotiation and not an ultimatum, there was no 24-hour deadline. Its no different than their tactics throughout this process. First they offer $31, and mumble couple of bucks more when its rejected without giving out the details and then within hours they pretend like they are no longer interested and "walk". Only to come back later with another complicated offer. They keep repeating these "walk" and "crawl back" sequences, with a loss of about 10% in MSFT stock every-time they do this.

Note that both YHOO and Icahn have filed the details with SEC. So I would definitely treat those versions to be more credible. Also both these versions are consistent with each other on facts and only differ on interpretations, unlike the statement from MSFT.

At this point, I'm convinced that MSFT is not in a financial position to do a deal for all of YHOO that has valuation guarantees, (like an all-cash deal for example), and that would be acceptable to YHOO shareholders. If they try to do this, their stock would lose even more value. So the only choices they have are:
1. to wait it out till either their stock improves or YHOO's stock drops.
2. do a partial deal that locks up YHOO, significantly limiting its options.
3. just give up on competing with GOOG, gracefully accept defeat and resign to the fate of losing their top-dog status.

I don't think (1) will happen, because whenever there is even a hint of YHOO deal getting closer to completion, YHOO stock appreciates and MSFT drops. (2) won't be acceptable to current YHOO shareholders and they may decide to wait for the current quarterly results and the annual meeting. (3) is something that is unthinkable for a company like MSFT, which has never lost that status so far.

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