Microsoft, Yahoo, and You

Ever since the Microsoft announcement of its intent to takeover Yahoo in February, the drama has been ongoing. To date, others have gotten involved, including Google, Time Warner with AOL, and if you believe it, News Corp. The battle on the surface seem to be for a larger chunk of the search market, but one has to wonder what else there is beyond this takeover.

To start with, the offer is more than fair, on January 31^st (just prior to the announcement), Yahoo closed the day at $19.18, and the unsolicited Microsoft offer at $31 a share cash/stock offered a huge premium. The price is unlikely to be matched by anyone else, Google wouldn’t care since it already owns the search market (77.7%) compared to the Yahoo (12.06%) and Microsoft (3.25%), no one else realistically has the money. The only reason that Jerry Yang and the Yahoo board has held out is that they’re greedy.

In this case, Microsoft is the one taking the risk, $31 a share would suck up a sizeable portion of Microsoft’s existing cash pool, the integration is fraught with danger, and should the bid be successful, integrating operations and keeping the remaining talent at Yahoo will be a tricky proposition at the best. I don’t believe the Ballmer red herring of trying to compete with Google. That just doesn’t make sense. Why would the number two and number three player merge and hobble themselves in the process to try to compete with the dominant player?

But Yahoo does own some other attractive pieces of property, for example, Yahoo’s email service still holds the largest market share, Yahoo Sports is a fantastic site that is also a wonderful money generator for the company, then there is Yahoo’s stake in Alibaba and Yahoo Japan. There are also other nuggets which Yahoo has acquired through its operating history. May be Microsoft is trying to buy enough assets to spin them off in the future, or gain presence in the Asia market, whatever the strategy, search is likely not a part of that big picture Steve Ballmer has formed in his head.

It’s obvious that Ballmer has pegged the price he is willing to pay and is unlikely to up the bid. The Microsoft ultimatum to Yang and company on April 1^st is timed to coincide with the Yahoo earnings announcement on April 22^nd. Three weeks to the day when Microsoft believes that Yahoo will either have to come up with great earnings, or just plain give up before Microsoft carries out the threatened proxy fight or lower the bid (which would just put a good majority of Yahoo shareholders in open revolt).

So how does this play for Yahoo and Microsoft stocks? For Yahoo, holding on to its stock at this point is a losing proposition, if you bought the stock on January 31^st, it should be sold because it isn’t likely to go much higher. As for Microsoft, if it doesn’t buy Yahoo, the stock will definite go up, but if it does get Yahoo, then it will face a tough challenge integrating the parts. But it really isn’t worth the gamble. So, the best choice there is to sell the stock if you can take profits now, or hold on and hope the takeover doesn’t go through, because if it does, you’ll be in the stock for the long haul.