MicroHoo: Still a Mirage

Unless you’ve been in a cave the last three weeks, you’ll have heard of Microsoft’s unsolicited bid for Yahoo! and followed the complex tango performed by the company’s respective top executives, Steve Ballmer and Jerry Yang. The soap opera-like unfolding of this financial ordeal played out daily in newspaper headlines, with assurances and deadlines from both sides ultimately being worth less than the ink it took to print them as Microsoft pulled its offer, abandoning talks three months into the process.

Well, in the end the magic numbers were 19, 33, 37, and 24. $19 is what Yahoo was trading at on January 31, immediately before the Microsoft acquisition story broke. Overnight, Yahoo daily share volume increase tenfold and share price skyrocketed about 53%, where it remained during the three months of talks. Microsoft’s final offer for Yahoo was $33 a share (a 72% premium over January’s pre-acquisition talks price), with Yang holding out for a sky-high $37 a share. Not unexpectedly, as today is the first full trading day since the end of negotiations, Yahoo’s share price has plummeted about 15% to around $24, the biggest drop for Yahoo in two years.

The questions being asked are how will Microsoft expand its online market share without Yahoo, and what Yahoo’s next move will be. There is some speculation that Microsoft is eying AOL, or waiting to get back at the table with Yahoo in a quarter or two (about the time it’d take to think of a better name for this deal than ‘MicroHoo’). Since Yahoo’s share price is hovering above the original $19 a share, I’d wager the latter is getting priced in.

Another issue that is getting priced in is the potential of a Yahoo-Google deal. The two had a mutually-described successful implementation of Google’s search advertising on Yahoo’s properties, which could point to future joint projects ahead. However, I think Google may have pushed a little harder to get in with Yahoo because of the pressure from the Microsoft offer. Now that there’s no competitor at the table, Google can take its time in whatever it chooses to implement, leaving Yahoo the big loser in all of this.

Indeed, it’s difficult to get away from being negative on Yahoo after everything is said and done. Despite Yang’s assurances that all is well, there is little that points to investing in Yahoo as a defensible long-term strategy that will produce returns. No doubt this aggravates shareholders and execs, who could have escaped with a sweet profit from the Microsoft deal. Any combination of the Big Three would be subject to government review and antitrust regulations, but this first move represents the opening gambit of an acquisition chess game as Microsoft looks to combat Google on its home turf, search.

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