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Microsoft Making an Offer for Yahoo: What Does it Mean?
February 1, 2008
Microsoft just announced an unsolicited offer to buy Yahoo! for $44.6 billion (see the letter from Steve Ballmer to the Yahoo! board). While Yahoo! has been struggling for a while now, especially compared to Google, apparently Microsoft sees enough there to offer a 62% premium to the market price. Wall Street thinks this might be “diworsification” for Microsoft, as its share price is currently down around 6%. What does it all mean for these companies and the tech sector in general, though?
Rick Munarriz at The Motley Fool predicted that Microsoft would try to buy Yahoo! about three weeks ago, and he lays out five reasons. To summarize his article, Microsoft needs a boost in search, provide profitability to its online operations, diversify its cash flow, provide inroads to the Asian markets, and it needs to do it fast before the regulators preemptively stop it. Yahoo! needs a savior; it is sinking and the list of candidates to help them is shrinking. None of the other search engines would be willing to do it because Google is too big and doing fine on its own, and the others are too small to pay such a large price tags. Internet conglomerates like IAC Interactive, with its measly $7 billion market cap don’t have the clout to do it. Microsoft has been sitting on a pile of cash for a long time and needs to do something with the money, either return it to investors via dividends or try to grow faster. It looks like they’re going for the latter option.
From an economic perspective, this deal seems to be saying that either that some of these former tech stars might have assets that aren’t being seen, or that a rebirth of optimism is at hand in the tech world. This will be Microsoft’s biggest acquisition ever, and by a long shot… the runner-up is aQuantive, bought for $6 billion last year. If the execs over at Microsoft are seeing value in Yahoo!, which even according to its CEO has seen better days, then maybe some of these other companies have some hidden value.
Now, the $44 billion question is… does this signify the re-emergence of Microsoft as a dominant player in the tech industry, or is it a death blow as a company tries to reach beyond what it is capable of? Hostile takeovers like this one often presage the loss of the executives and others who actually know the business, which is especially important in tech companies, according to George Askew and Scott Devitt of Stifel Nicolau. However, other analysts disagree. Brent Thill and Mark Mahaney, analysts at Citigroup, think this is a good fix to an ongoing problem: how to increase the searching market share of both companies by combining, as Google has been eating their lunch for years now. Walter Pritchard, of Cowen & Co, sees this as a conservative bet instead of the ‘big, bold moves’ that CEO Ballmer has said were his strategy. I tend to agree with this last assessment. Yahoo! was big news eight, nine, or ten years ago, but what does it have in the pipeline? Do you think that monetizing Yahoo! Chess is going to start bringing in a lot of extra money? To me, neither Microsoft nor Yahoo is steering into the future, and lashing the two ships together won’t change their direction.
(back to A Geek Talks About Money)
Bill Laboon does not own shares of any stock mentioned in this article, except indirectly through index funds.
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