Sometimes I wonder why we pay analysts, I mean, is the first bloke really going on a limb by raising his price target from $26 to $31? Anyway, interesting nonetheless:
A Banc of America Securities analyst downgraded Yahoo Inc. on Tuesday, but spoke positively of Microsoft Corp.’s $41 buyout offer for the Internet search engine.
Analyst Brian J. Pitz downgraded Yahoo to “Neutral” from “Buy” and raised his price target to $31 from $26, saying the shares may trade on company corporate actions as opposed to fundamentals in the near-term.
Pitz encouraged investors to take advantage of Microsoft’s “generous” offer, noting Yahoo is struggling to re-energize its ad business and keep Google Inc. from taking more search market share.
“Given the significant (62 percent) premium above the Jan. 31 stock price, we believe shareholders would be apt to take advantage of this offer,” he said in a client note.
Yet Pitz noted that Yahoo’s stock may be prone to peaks and valleys in the coming weeks due not necessarily to its fundamentals, but to aspects relating to the buyout.
He believes more bids could still come in for Yahoo, especially from a private equity firm. And Microsoft’s deal might not even go through, as it still faces immense regulatory hurdles, especially in Europe, he said.
Were Microsoft to finally gain control of Yahoo, it could provide Google with a short-term boost, as the new company would be distracted by the integration and cede more market share to Google, Pitz said.
As large as $44.6-billion (U.S.) sounds and as generous as a 62 per cent premium seems, that is really only Microsoft Corp.’s opening salvo for your Yahoo Inc. shares. The $31-a-share bid was certainly good enough to get shareholders jumping up and down over their good luck to have held onto Yahoo’s shares, even as they slid 40 per cent during the three months leading up to the bombshell bid. But that does not mean Microsoft can’t, or won’t, sweeten the deal.
According to Peter Misek, an analyst at Canaccord Adams, Microsoft will succeed in grabbing Yahoo, but only at a price that will make the $31-a-share offer look like a stink-bid by comparison. “Microsoft would, in our view, be willing to pay close to $40 per share in order to consummate the transaction on friendly terms with Yahoo,” Mr. Misek said in a note to clients. “While it is possible that a second bidder may emerge, we believe the magnitude of the transaction and Microsoft’s financial assets make it the likely winner.”
That’s potentially great news for Yahoo shareholders who are willing to hold on during the ups and downs of this bidding process. Of course, the downside is that a bigger bid will not be good for Microsoft shares, which is why Mr. Misek has slashed his target price on the shares to $32 from $40, and reduced his recommendation to “hold” from “buy.”
“If and when the agreement is consummated, we believe that investors are likely to take a ‘wait and see’ approach until the company is able to demonstrate traction with integration and realizing synergies,” he said. “In the long term (1-2 years), we continue to be bullish on Microsoft’s prospects.”
Which ones to believe? I think that indeed the MSFT $31/share offer is just the opening shot. MSFT is willing indeed to go all the way up to $40, or $50B (YHOO has 1.25B shares outstanding). If you read between the lines, MSFT’s CFO is already managing shareholders’ expectations by hinting that the company will be raising debt to acquire debt. Which by the way, I think is smart. MSFT has the chance to duplicate its mammoth revenue streams from Office and Windows from the online advertising market, which is booming and in which MSFT needs to compete in to remain relevant and the most valuable technology company around.
Note: Long YHOO, no position [yet] in MSFT.
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