Delaying a takeover ups regulatory pressure and gives Yahoo's new ad system a chance to boost the stock, forcing a sweetened bid
Yahoo's resistance to a takeover by Microsoft looks foolhardy to some investors and Wall Street analysts. But the push-back may prove effective in the end—at least by forcing the suitor to cough up a few more bucks a share.
Executives from Yahoo (YHOO) on Apr. 7 reiterated the reasons for their opposition. The $31-a-share offer, made public Feb. 1, "substantially undervalues" Yahoo, and its stock component is even less attractive in light of Microsoft's (MSFT) slumping share price. "We have continued to launch new products and to take actions which leverage our scale, technology, people, and platforms as we execute on the strategy we publicly articulated," Yahoo Chief Executive Jerry Yang and Chairman Roy Bostock wrote.
The letter was addressed to Microsoft Chief Executive Steve Ballmer, in response to Microsoft's threat to take the proposal directly to shareholders. "The public equity markets and overall economic conditions have weakened considerably, both in general and for other Internet-focused companies in particular," Ballmer wrote in the Apr. 5 public appeal to Yahoo's board (BusinessWeek.com, 4/5/08). "By any fair measure, the large premium we offered in January is even more significant today."
The Fruits of Time
But holding out may force Ballmer to up the ante. Analysts think Microsoft could eventually sweeten its bid to as much as $34 a share. In an Apr. 6 note to investors, Citigroup (C) analysts Mark Mahaney and Brent Thill wrote that they would consider $34 a "reasonable" offer. UBS (UBS) analyst Benjamin Schachter also believes the deal could be raised to $34.
By delaying, Yahoo increases pressure on Microsoft to hike its bid to push the deal through before regulatory conditions grow unfavorable. Resistance also buys Yahoo time to introduce a product or service that stirs investor excitement, thereby raising its share price and making the 62% premium Microsoft offered over Yahoo's Jan. 31 stock price of 19.18 look like a lowball bid.
Microsoft also needs to win global regulatory approval for the deal. Delays give opponents more time to foment antitrust opposition, particularly in China, where an Aug. 1 law gives authorities greater leeway in scrutinizing large mergers that could be deemed anticompetitive. "Yahoo seeks to gain leverage by extending the time for regulatory approval internationally, thereby putting Microsoft in a position to lose the deal altogether," says Lee Westerfield, U.S. Internet analyst at BMO Capital Markets.
New Yahoo products are in the works. On Apr. 7 the company previewed its AMP! advertising management platform. The system unites many of the advertising acquisitions and investments Yahoo has made in the last year, including the $720 million purchase of ad exchange Right Media. AMP! is designed to persuade major publishers to buy and sell their online inventories on Yahoo's system by creating an open market for ads. "The impact is hard to overstate," wrote Yahoo President Sue Decker in a blog post.
Under the Radar
Some in the online ad market believe AMP! has the power to substantially increase Yahoo's value in the long term. R. Michael Leo, co-founder of aQuantive, the advertising outfit Microsoft purchased last year for $6 billion, says Microsoft is trying to get Yahoo now—before AMP! has a chance to start generating revenue and increase the portal's value. "The Street isn't taking this into account," says Leo, now CEO of ad management software provider Operative. "[Microsoft] probably thinks it's going to get this on the cheap."
Certainly, some shareholders agree with Yang that Yahoo should hold out for a better offer. Bill Miller of Legg Mason (LM), one of the largest institutional investors in Yahoo, said in February that Microsoft must raise its offer for a deal to go through.
But that view isn't universally held. "If we were in the midst of a bull market, I would be tempted to let Yahoo have some more rope and demonstrate that it can be more like $40 or $50 a share," says Kevin Landis, chief investment officer at Firsthand Capital Management, which owned more than 1 million Yahoo shares at the end of last year. "But we are not in a bull market. I can take that $30 or $40 and buy a bunch of really great tech companies at pretty steep discounts…I want that deal to go through." Yahoo shares slumped 2.3%, to 27.70 on Apr. 7.
Yahoo will get another chance to prove whether resistance makes sense on Apr. 22, when it releases its first-quarter results. A quarter that outperforms forecasts would strengthen Yang's hand.