Microsoft Finally Goes Hostile on Yahoo

http://www.princeofwallstreet.com/2008/02/01/micr…

Obviously everyone and their mother is commenting on the announcement today but the Prince couldn’t resist. Let the battle begin. The Prince loves a good M&A battle which will no doubt drag on for months in the financial press. Found memories of the public battle between the love triangle of Johnson & Johnson, Boston Scientific, and Guidant run through the Prince’s head right now. Microsoft’s bid of $44.6bn offers an eye-opening 62% premium on Yahoo’s share price and is clearly an attempt to stop a bidding war for Yahoo. However, even at this ridiculous price is Yahoo still undervalued? The $31 a share offer is below where Yahoo’s shares were trading in late October.

Yahoo’s past coldness towards Microsoft makes The Prince believe that Yahoo will probably be retaining Goldman, Morgan Stanley, Lazard to do their takeover defense. The financial press hasn’t really emphasized that this is a hostile bid for Yahoo and that the management of Yahoo certainly is not hot on Microsoft. Unsolicited bids are risky in industries that are people-intensive since they tend to scare aware the target’s employees. Yahoo’s board said they would carefully consider the offer but you have to believe that they will get their bankers to round up some more bidders. Balmer in the conference call said that he talked to Jerry Yang the night before the announcement but was quiet about the response he received. If private equity hadn’t of hit a speed bump this summer we would probably be talking about a Blackstone and MDP joint bid for what may have been the largest LBO ever.

For years Microsoft has been flirting with Yahoo without Yahoo showing the love. Now that Microsoft has made a move what are the merits of a tie-up between the two companies? For all of Yahoos troubles, Microsoft has yet to prove that it can do any better in online advertising or search. Its Internet businesses have tried to buy their way into the business without the best technology. Of course we all know that technology development and marketing cost savings would be significant. Overlapping development teams would probably be the first to go. Microsoft estimated that there was at least $1bn in cost synergies in the deal but that is probably too rosy given the complexities of integrating such a large company. Microsoft also gave the rationale on their conference call that online advertising is a $40 billion market, forecast to grow to $80 billion in the next three years. Yet, Yahoo has been losing more share to small players and Google. Microsoft will have to reverse that for this merger to be success for shareholders.

In many ways Yahoo, because of its dependence on human capital, is a lot like an investment bank that gets bought. The best people leave and the acquirer is left with office buildings, infrastructure, and the marginal employees. Comparisons are already flying that this deal is going to look like AOL/TimeWarner until it proves otherwise. Even if the deal will be a success Microsoft will certainly face anti-trust allegations. It already doesn’t have many friends among the EU regulators. The Prince can’t foresee those same regulators letting this deal sail by.

The Prince believes that if Microsoft succeeds in this takeover (which is highly doubtful given the regulatory problems and possible competing bidders) the company will see it as their biggest mistake five years from now. The Prince can only acknowledge that watching this hostile takeover move forward is sure to be fun.

http://www.princeofwallstreet.com/2008/02/01/micr…

-The Prince http://www.princeofwallstreet.com