Background
On March 27th, I suggested that MSFT should spin MSN.com/Live.com into Yahoo! In fact, afterwards a reader even sent me a link to John Battelle’s like-minded suggestion, time-stamped March 13th.
Bear in mind that last year, it was widely reported that Merrill Lynch analysts etc. suggested an all-out buyout of Yahoo! by MSFT, which at the time I did not think would be possible given YHOO’s desire to remain independent.
Recent Developments/The Rumors Start Again
Today the rumor mill began again, after Google bought Doubleclick and Yahoo! bought Right Media, Yahoo!’s appeal to MSFT only shot up. YHOO is my biggest holding in my portfolio, I am actually doing a live post on whether I’ll sell or not today here.
And of course, Terry Semel is doing the keynote at MSFT’s shindig. Things that make you go hmm…
From Marketwatch:
The New York Post and The Wall Street Journal reported that Microsoft may want to buy the firm in what could be a $50 billion deal.
Microsoft’s interest may be piqued by Yahoo’s recently announced intentions to buy Right Media to strengthen its display-advertising business. The deal “better positions Yahoo to compete with Google in display,” Bear, Stearns & Co.’s Robert Peck told clients.
Yahoo and Microsoft reportedly have held talks within the past year but couldn’t reach an agreement.
A spokesman for Yahoo said the company wouldn’t comment on market speculation. Microsoft, in a statement e-mailed to MarketWatch, said: “At this time, Microsoft has no comment.”
The Post, citing anonymous sources, said Microsoft has intensified its pursuit of Yahoo and has requested formal talks. Analysts say Microsoft may be feeling increased pressure from Google, which recently bought DoubleClick for $3.1 billion.
The Journal suggested that Microsoft could go for a smaller deal, spinning its online group into Yahoo in return for a stake in Yahoo.
Hmm… where have we heard that before?
Of course, everyone is adding their two cents, and that’s great, here’s one of my favorite observations, from Adam Lashinsky of Fortune blogs:
The article reads like banker talk: Investment bankers on one side or the other (or, better, a banker who couldn’t get a seat at the table) chatting up a deal to get things moving.
A Shareholder Asks: What Are Yahoo!s Options?
I’m asking myself: should I sell my holdings? I had a nice gain wiped out after Q1 results when YHOO let one rip and everyone in the room heard it. At the time I reiterated the pros of spinning a new MSN/YHOO online entity, but also reiterated the virtues of going private, where I believe YHOO (like DCLK) can triple in value by doing so.
I would like to stress that by now, this idea of spinning MSFT’s MSN/Live.com and YHOO in a separate company (outside of MSFT) is pretty much agreed to be the best solution. Henry Blodget is blunt and right on about why here.
And of course, Paul Kedrosky comes out and points out the inherent foolishness of doing just that:
Some people are saying that Microsoft needs to spin out its “Internet” business and combine that with Yahoo. Newsflash folks: This is 2007, every technology/software business is an Internet business. If you want to make the argument that MSFT needs to carve out media and advertising then make it, but don’t conflate media/ad with Internet and pretend the latter still remains a distinct category, because it doesn’t.
Pretending there are are Internet and non-Internet aspects to a tech company like Microsoft is like pretending you can have peeing and non-peeing sections in a swimming pool. It doesn’t work.
That’s precious, what a gem (almost as good as my line that if “prostitution is the oldest profession in the world then the oldest habit in media is publishers prostituting themselves for advertisers” here, but we’re sidetracking now). But indeed, I see that “This is 2007, every technology/software business is an Internet business,” and indeed my argument is to combine the “online advertising and search units,” hence why in my earlier post I explicitly say “spin MSN.com/Live.com into Yahoo!” and not “spin the Internet stuff out.” Though even then, I sort of see that one major reason for this kind of deal is the fact that software and online advertising will coexist sooner than later and this is done to offset Google’s foray into MSFT’s software.
Deal Structure: All-Cash, All-Stock, Half-Half?
MSFT has $25B in cash, according to Yahoo! Finance. While it won’t hand over every penny its got in its corporate coffers (and issue the rest in stock in a 50-50% cash/stock deal), it does generate something like $1B per month in free cash flow. Then, there’s debt. MSFT can easily raise debt, plenty of it, and pay YHOO shareholders $50B in cash.
MSFT is a growth and value stock at once, as a YHOO shareholder, I’d ask for a 50-50% deal. Note, that I owned MSFT for a while, getting in at $22 and selling at $30 this past year. Did I think there was no upside at $30? Not necessarily, but a combined MSFT/YHOO would represent some nice upside, though there are operational, cultural and financial risks for sure.
Tale of the Tape
Before this rumor crept up, YHOO’s valuation was at $32 billion. According to PaidContent.org, YHOO’ shares surged in overseas trading on news of the talks, raising the company’s market value to around $38 billion on Friday. Now the rumor has shot the valuation to $44B.
If this happens and MSFT buys YHOO for $50B, I make an additional 13%, if I sell now - that assumes that this deal won’t happen - I make a decent return and effectively end my three year support and love affair with YHOO. Of course, if the deal does not happen, does the stock fall back down to what it was at a valuation of just less than $37B?
Disclaimer: If it hasn’t been made super clear yet: YHOO is my biggest holding. See what goes through the mind of an investor here. Anyway, I’ll write more throughout the day.
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