On Microsoft's Bid To Acquire Yahoo

How could I not write about the hottest topic of the day? Not most important, mind you. But most shocking and popular. I am referring, of course, to Microsoft's hostile tender offer of cash or stock for Yahoo.

Yahoo was worth, as of yesterday, pre-offer, some $25-27B. That's taking the 1.34B outstanding shares at the closing share price of $19.1. Microsoft offered a 60% premium, or $44.6B, worth about $31/share of Yahoo.

The software giant currently has about $19B in cash, making the all-cash version of the offer seem very feasible, as it carries no debt.

By this point, 1PM EST, some six hours after the announcement, every pundit on the planet has probably weighed in on this takeover.

Here's my sense of it.

First, like one of my techie friends who happens to hold Yahoo share, this is clearly a godsend for Yahoo shareholders. As the nearby, Yahoo (naturally)-sourced price chart reveals, it's been at least March of last year before the stock's price was, even for short periods, routinely above Microsoft's offer price. Jerry Yang's resumption of the CEO role last summer has cratered his firm's stock decisively since then.

As for Microsoft, I pity their shareholders. If they didn't have half of this offer in cash on their balance sheet already, would any bank lend them all of the money for this takeover bid? Could even Goldman float a bond issue to fund this for them at reasonable rates?

If anything, I think it reminds us, per my many posts on Microsoft, Gates and Balmer (see appropriate labels), that the company has been very sloppily managed in a financial sense.

How many shareholders, had the $19B been dividended back to them, would gladly give it back to own Yahoo? I'm guessing not many.

As the nearby, Yahoo-sourced five-year price chart of Google, Yahoo, Microsoft and the S&P500 illustrates, neither the acquirer, nor the target in this deal has performed particularly well lately. Microsoft has underperformed the index for the bulk of the period, getting a brief, recent bump. Yahoo did well for the first two years, then crested and has been sliding ever since early 2006.



From a longer perspective, the same chart looks like this. Google's rate of increase far surpasses either of the other two. Since 2000, Microsoft hasn't outperformed the index, and Yahoo has fallen precipitously, on a net basis, with a valley and gentle hill in between.



Clearly, neither Microsoft, nor it's target has been the subject of appreciative investors for their fundamental performances.



Here's my post from last May, when this idea was last in circulation. And a related piece from last week, focused on eBay, but touching, generally, on the concept at issue here. In the first post, I wrote, in part,



"First, doesn't one of the partners usually have to be successful already for this sort of combination to work?



Second, why would a merger of these two huge, lumbering companies create more than a more focused, nimbler marketing alliance agreement between the two? The latter would be far more likely to succeed, in my opinion. These two technology giants are already past their prime and too sluggish to have a high probability of combining in a manner that can yield a consistently superior total return performer. The companies are not similar in their product/markets, so there won't be much in the way of cost savings, yet they will spend considerable time and money attempting to mesh and reorganize post-merger. I suspect it is a recipe for disaster.



Third, Yahoo is, in my parlance, the 'used car of the internet.' This is going to be Bill's/Steve's new ride? Hardly an inspiring last act for the software titan. Can't they do better than a bumbling online-oriented hodgepodge of businesses mismanaged by ...?



Fourth, together, these two still probably won't catch Google. It's not about the software....it's about the ideas. Neither has shown themselves capable of generating successful new ideas which have driven consistently superior total returns in the past five years. How will just mashing the two mediocre firms together change that?"



None of which, I believe, have changed in the intervening months. Except Yang, rather than Semel, is mismanaging Yahoo now. I concluded the post with,



"If this combination materializes, I will go on record predicting that it will not result in a firm that can regain a pattern of consistently superior total return performance. It will, over time, fail shareholders, relative to their option of simply buying the S&P index."



I still believe that, as well. Various pundits may extol Microsoft getting Yahoo cheaply. Or the back-end consolidation of their search engine and advertising businesses.



One bright pundit, Forbes' Dennis Kneale, opined, in a fashion similar to my partner, from this post, that Yahoo is a 'groups' type company, and Microsoft's Facebook investment might offer some value in relation to that. This post sheds some more light on the whole online 'community' business.

But even this begs the question of how all this value will be magically spun from the meger of these two aged, bloated tech titans?



Yes, it's a hot story today, alright. Very exciting for the tech, media and M&A crowds. Let's see how exciting it still is for Microsoft shareholders and/or Yahoo employees in, say, 15-24 months?