Microsoft’s Bid For Yahoo

| February 4, 2008 | 0 Comments

The snow was falling hard on the mountains. From the lodge, our view of the peak at 13,000 feet had disappeared. The best snowfall in 30 years is what the locals were telling us – and more was on the way. Howard and I stood by the crackling fireplace drinking beers and talking about the recent news. Microsoft’s (MSFT) hostile bid for Yahoo (YHOO).

Where was I?

This past weekend I was with a group of financiers in Telluride. The invitation-only gathering was small, only 35 people including Howard and I, but the attendees were leading Venture Capitalists from North America. For the past few years I had been invited because of my connections in the investment banking world.

Telluride, for those of you who don’t know, is a small mountain town in Colorado. It hosts some of the world’s best skiing and has been phenomenal this season. Despite the great skiing, we couldn’t help but discuss the market’s and how to make money from them.

Back to Howard.

Howard is a hedge fund manager in Canada with a focus on technology. He manages a lot of money for his investors, and has a gift for picking stocks. To say he is good at his job would be a terrible understatement. Howard is sharp and the more he talks, the more people listen.

The Microsoft and Yahoo news quickly spread through our little group via our Blackberrys’. Conversations quickly shifted from snow fall and ski runs to the takeover bid.

Microsoft buying Yahoo seems straight forward. Google dominates the online search industry. Yahoo is a consistent second place finisher. Microsoft, despite the world’s best software suite and mountains of cash settles in a distant third. At last look, Microsoft only captured 3.5% of the total market. By buying Yahoo they would build instant market share and hopefully use their technology to compete with Google.

Why now?

Yahoo has fallen on rough times. Look at this chart which starts two years ago and stops right before the recent news. Yahoo is selling at a discount, and is clearly a great buy.

But is Yahoo worth the price?

That is a much tougher question.  If Microsoft is successful with the buyout what do they get?  They get Yahoo’s technology and a second place finisher in the search engine wars.  Microsoft might be able to capitalize on the search position and integrate their technology, but is that worth $44 billion?

I don’t think so.

I learned during my time as an investment banker that mergers are tough.  For every one success you have a hundred failures.  In a hostile takeover the success rate is even smaller.  If Microsoft is successful at buying Yahoo they’re going to suffer a massive case of indigestion.

Microsoft is playing a losing game.  The price they’re paying for Yahoo is too high.  The publicity from this transaction will likely encourage other bidders, driving up the price.  Yahoo will also fight this acquisition tooth and nail.  Needless to say, this will only damage relations between the two companies (remember Time Warner and AOL?).

I think Microsoft will continue to trade lower as more details about the takeover, and Yahoo’s attempts to fight it, become available.  Buying intermediate term puts on Microsoft might be a good way to profit from this news and likely outcome.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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