Does A Yahoo Takeover Make Sense For Microsoft?

Microsoft offers a knockout blow to acquire Yahoo for $44 billion or about $31 a share vs. $19 where it closed yesterday. It's a hostile bid (why wouldn't Jerry Yang embrace this?) so the price reflects a Murdoch type strategy to crush any theoretical opposition with an offer that can't be refused. The market will love this and the futures are strong at this hour, even thought Goldman Sachs is predicting that there are still $60 billion in subprime writeoffs to come.

An obvious benefit for Yahoo holders. Does it make sense for MSFT? There will be the risk of consolidating two different cultures, but it's attractive from a cash flow return. Yahoo generates about a billion dollars in free cash flow now. I would guess Microsoft feels they can at least double that, and if that's correct, then the cash flow yield on the deal would be about 5%. That's enough to justify the big price tag.

It's interesting the deal comes at a time when Google just issued its first less-than-spectacular quarterly report. I would guess MSFT trades down as the acquiring company often does, but Steve Ballmer has done an excellent job as CEO of MSFT, and I think this is a logical step to jump forward into a very attractive area. I would bet that MSN stays as a separate brand and that Yahoo, with MSFT's financial muscle behind it, re-emerges as a competitive threat. I own MSFT and would be a buyer on this news. I said the other day that new leadership emerges during turbulent times, and besides refering to financial stocks, I mentioned a shift in tech names. Out out of Apple, Google, Research in Motion, Amazon which were great to own last year, and into MSFT, Cisco, Texas Instruments (all of which we own at Scotsman), Intel and IBM

Time Warner (which I own) and ASK.Com will trade higher on this news. Apply the MSFT/YHOO valuation and the others are worth more.

Almost makes you forget that the jobs numbers comes out this morning. Also, I'm watching Steve Liesman right now and he's reporting that there's a bank consortium being formed to help rescue the bond insurers. The banks are working with the NYS insurance department. The market will love this as well, but I find it hysterical that the banks, who are needing international rescue themselves, are going to turn around and be the rescuer.

And here I was hoping for a quiet day.

Comments

[ajax2]

As a Yahoo consumer for years, I dread the day that Microsoft takes over my Yahoo mail, voip, page, news gathering, and search.

What is now a user friendly multi facted platform would turn into another MSN nightmare.

[realitytrumpsbull]

Yahoo! became infamous by diming out a chinese dissident to the Chinese government, which we can only assume then resulted in Dire Consequences for that person. Since Microsoft is all up in your hard drive, and probably pretty pally-wally with OUR government and so forth, is this a case of 'birds of a feather flock together'?

[Rocku]

I dunno... Yahoo was already in trouble when the "Hollywood Crowd" took it over a while back. Now they have have a new CEO cut from that same cloth (marketing not technology), and they havent been doing much innovating on the tech front either lately. It would be nice if the combination of Microsoft and Yahoo produced a better product for both of them, but given past track records, it could just as easily produce lesser products and services for those who use them. Only time will tell!

[wrabbitt]

Microsoft needs to do something, after the mess called Vista has caused to many people to reload XP. What were they thinking? It takes time to get used to using Vista. And its a total different op system. and many people don't want it. in june of 08 microsoft will change all this by forcing us to use Vistacrap. Will they take Yahoo and turn it into crap also?

[ProgressiveBum]

MSFT's move is not surprising, due to their rather dismal product offerings these days. Vista is not generating the revenues it was expected to, Office 2007 with the OOXML flap, and legal challenges in Europe all point to lesser revenues and larger legal/penalty costs in the future.
Some 25 years ago MSDOS was a large cash cow due to the agreement with IBM thal allowed MSFT to buy innovation rather than innovate themselves. Not much has changed since, yet the emergence of Google has proven that innovation is where the money is. MSFT is at a crossroads, and even they realize that business as usual won't do anymore.
For years I've been using various Linux distros exclusively, and staying away from MSFT products. It'll be interesting to see what anti-trust has to say about the proposed deal, and sincerely hope that Yahoo can stay independent of MSFT.

[EdwardUlyssesCate]

The money managers are simply merging plantations to gain revenue and save expense, as documented today at http://GreatRedDragon.com .

Yahoo! is sadly in a no-win position. If they fight the acquisition, they will see their stock value collapse, and the money kings pick it up on the cheap. It would not surprise me if that had not already been done to set Yahoo! up for this event. If you take the time to check out the major holders of Google, Microsoft and Yahoo!, they're all related. The same money kings recently performed exactly the same nonsense against NovaGold when they fought against a hostile takeover by Barrick Gold.

[MaDem]

I'd stay away from Yahoo. From the beginning, there's been something basically loser-ish about the company, no matter what they've accomplished by desperate means. And I, like many others, know all too well the company has a scummy, cheating side: they have ripped off many, many Americans and I assure you, do not give a damn about that. Over the period of one year, because they had my debit card number, they helped themselves to $600 from my checking account, and gave zero in return. Nada, nothing, rien, zilch. When you deal with Yahoo, you have to run and take a hot shower to rid yourself of their slime. Microsoft is way too good for Yahoo.

[kbckc]

Google is keeping Microsoft awake nights. This move doesn't surprise me at all. It is important to remember that Microsoft does not innovate products and services. They never have. Their model has always been and still is the old Japanese formula. Let others do the inventing and creating. When the idea or concept firmly takes hold, horn in on it and try to up the ante or out-market existing sources. The main flaw with Microsoft is, unlike their Japanese counterparts, they have never focused on improving quality or function, and their version of most everything is so bug-infested that big money is made cleaning up after them.

[JTex]

Wow. Completely disagree that it would be good for MSFT--I see it as them simply taking out a competitor. I do not own any goog, but I'd seriously look at buying it now as their top competitor will surely flounder more now that their "little" boat will be towed to the msft cruise ship, bobbing and squiggling in their wake, but not able to stop, start, or change direction without the ship leading the way.

I need to start thinking of the companies msft has bought that continued their success after the acquisition. Offhand, can't think of any, but I'm sure there will be some-maybe.

This is yahoo's burial, imo. Nice to know ya.