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Yahoo Tries To Reject Microsoft’s Buyout Offer

Yahoo’s board voted to reject Microsoft’s $44.6 billion offer to buy the company. The board rejected the offer, saying it “massively undervalues” Yahoo, and thinks that Yahoo’s investments in Panama will eventually pay off and remove the need for the company to be bailed out, at least at that price. Most believe that the company will agree to a sales at $40 a share, $12 billion higher than the original $31 offer.

The problem for Yahoo is that investors want Microsoft to buy the company, and if the Yahoo board manages to screw this one up, the market will make them suffer. There are only a few possible scenarios left for the embattled internet company:

  • Microsoft increases its offer to match the $40 level. That would require $56 billion, half cash, half stock. Microsoft was already going to borrow about $10 billion, now it’ll have to pick up $15-18 billion in cash, plus give up an additional $6 billion in stock. It’s a lot of extra money, and Microsoft may balk. Luckily, there’s always option two:
  • Bargain the price down. Microsoft wants $31, Yahoo wants $40? You don’t have to be King Solomon to think up $45.5 per share. That’s mean an even $50 billion, and extra $3 billion in cash to borrow and $3 billion in Microsoft stock to give to Yahoo shareholders. Perhaps a little more manageable.
  • Or, Microsoft could go hostile, and bring the $31 offer to Yahoo’s shareholders. The shareholders are freaked at the idea of Microsoft quitting on them, since they bid up the share price and stand to lose a lot as the stock tanks after a withdrawn offer. A hostile takeover bid would put Microsoft in charge of the terms, getting the price it wants and kicking Yahoo’s board to the curb. The company stockholder meeting, later this Spring, will be the site of a showdown.
  • Finally, Microsoft could quit. The stock price will fall at least ten, possibly fifteen dollars. Heads will roll on the board as shareholders demand someone pay the price. The turmoil of the event rocks the company and sends even more employees for the hills. And, just as things seem at their worst, Microsoft offers to buy the company… for $27 a share.

Some other things to note: Microsoft’s offer to buy Yahoo has sent its own stock price down four and half dollars since the offer was made, costing the company over $40 billion off it’s own market cap. That means, until the stock recovers, Microsoft will have lost something like $80 billion, plus.

One other problem: Since Microsoft’s offer is half for cash, half for stock in Microsoft, that means that as Microsoft’s shares decline, so does the offer. With the stock portion now down the $26.64 per Yahoo share, the full offer is $28.82 per share, making it worth $41.46 billion, down over three billion dollars. If the price decreases further, Microsoft will either save money, or have to increase it’s offer either way.

You can use the MSFT-YHOO bid calculator to determine the difference between Microsoft’s original offer and the current price, based on market fluctuations.

February 11th, 2008 Posted by Nathan Weinberg | Yahoo Acquisition, Corporate, Yahoo | no comments

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