Marcial: Microsoft, Google Good Bets

Whether Microsoft gets Yahoo or not, some investing pros see money to be made long-term on the kings of software and search

by Gene Marcial

With Microsoft (MSFT), Google (GOOG), and Yahoo! (YHOO) ensnared in troika-like machinations, how should investors approach this intriguing triangle? Some of the smart-money pros think this unprecedented battle of the tech titans could produce solid returns for their portfolios, if played adroitly.

Microsoft's hostile $44.6 billion bid to gobble up Yahoo has forced Google to engage the software giant in a battle to protect its turf in search. (The deal's current value is $41.5 billion, based on a drop in Microsoft shares since the Feb. 1 announcement.) Regulatory issues would stymie any attempt by Google, the No. 1 Internet search engine, to launch a rival bid. Nonetheless, Google is determined to stop any Microsoft-Yahoo deal, and one way to accomplish that is to convince Yahoo to form an alliance in Web search. Yahoo is No. 2 in that lucrative business.

Yahoo's stock skyrocketed from $19 a share to $28 after Microsoft unveiled its not-too-unexpected designs. Microsoft's cash-and-stock offer is equivalent to $31 a share, So unless you are a nimble trader, forget about chasing Yahoo. The big money has been made. The risks in pursuing Yahoo stock at this high level should scare anybody who isn't a prescient, professional, swift-footed trader.

But there is a way to win from the Microsoft-Yahoo-Google triangle. First, assume that Microsoft will play a hard-knuckle brawl and won't let Google get in its way. Assume, as well, that ultimately Microsoft will have its way with Yahoo, perhaps paying a few billion more for the embrace.

Things Could Get Ugly

Yahoo will, of course, attempt to delay any deal as part of a strategy to persuade Microsoft to up the ante. Microsoft might just do that, up to a point. But since it doesn't look like there are eager white knights waiting in the wings—because the deal is mighty expensive as it is—Microsoft may not be inclined to be too generous with its offer. And who, aside from Google, has the resources and capability to pursue Yahoo at this high price and expect to benefit from the chase?

Yahoo may want to outsource part or all of its search-engine business to Google and others. That, of course, would be anathema to Microsoft, which could drop the entire offer. In that case, Yahoo's stock would crash and leave its shareholders in limbo. At best, Microsoft will fight like an enraged rejected suitor to get what it wants. That could get ugly. And Yahoo would see its chances vanish of providing shareholders with the value they deserve. Nobody can guarantee, or even imagine, that Yahoo's stock price will get to the level it is today without a deal like the one that Microsoft is offering. Yahoo shareholders have been waiting patiently for a turnaround. The Internet bubble burst in 2000, and the tech bulls have left Yahoo's playroom.

So what should investors do? You can't go wrong at this point if you buy shares of both Microsoft, now trading at $28—off from $37 in November, 2007, and way down from its high of $59 in 2000—and Google, currently at $505, down from its high of $747 on Nov. 7, 2007.

An Underappreciated Microsoft

Why buy Microsoft and Google now? Both are down from their highs and are looking very attractive as long-term holdings based on their prospects for solid growth. One big investor who has been upping his stake in Microsoft and Google is Martin Sass, chairman and CEO of M.D. Sass, an investment management company that shepherds $10 billion. Sass first purchased Microsoft shares in May, 2007, at $28 a share, and Google when the stock was at $365. Sass considers Microsoft a "value" play and Google a "growth" stock.