Now That Earnings Are in, When Will Microsoft Go in for the Kill?

If the tech world were the animal kingdom, this week's earnings results from Yahoo (YHOO) and Microsoft (MSFT) would show that the former is a wounded animal, while the latter remains a robust, healthy specimen.

According to the law of the jungle, the strong eat the weak. The only question is, when will Microsoft go in for the kill?

On Thursday, Microsoft reported solid first-quarter earnings results that beat Wall Street expectations, providing a bit of good news for an otherwise bleak tech sector. The company reported revenue of $15.1 billion, up 9 percent from $13.7 billion one year earlier. Analysts had been expecting revenue of $14.8 billion. Profit rose 2 percent to $4.4, or 48 cents per share, beating Street estimates of 47 cents per share.

But in a sign that the Microsoft expects to feel the effect of the slumping economy, the company lowered its full-year revenue forecast to a range of $64.9 billion to $66.4 billion, down from a range of $67.3 billion to $68.1 billion.

Still, the company's solid results -- which were powered by strong sales of new server offerings -- were a welcome respite from a string of bad news and layoffs that have weighed down the tech sector. Microsoft shares rose as high as 5 percent in volatile after-hours trading.

Microsoft's results come amid renewed chatter over whether the company will make a renewed attempt to buy Yahoo, which posted disappointing earnings earlier this week as it announced plans to cut at least 10 percent of its workforce.

With Yahoo's condition continuing to worsen, Microsoft has the luxury of time. In particular, Redmond may be waiting to see the outcome of two important developments for Yahoo.

The first is whether the ailing internet giant will attempt to buy all or part of AOL, the internet unit of Time Warner (TWX), which the media giant hopes to spin off. Microsoft may be waiting for Time Warner's earnings call on November 5th, which may shed some light on AOL's fate.

The second is the outcome of Department of Justice's review of Yahoo's controversial search ad pact with Google (GOOG). The deal has faced strong opposition from some advertiser groups, as well as lengthier and tougher regulatory scrutiny than either company appears to have expected. If the deal is rejected, Microsoft may swoop in with an offer for Yahoo's search business.

"We believe Microsoft is waiting in the wings to replace Google as a search outsourcing partner," Marianne Wolk of Susquehanna Financial Group, wrote in a recent note to clients.

UBS analyst Ben Schachter agrees that a renewed Microsoft bid for Yahoo may be only a matter of time.

"We don't know when, but at some point, we continue to believe that Microsoft will acquire Yahoo if it intends to compete against Google online," Schachter wrote this week.

Microsoft insists that it is no longer interested in Yahoo -- despite a recent apparent slip of the tongue from Steve Ballmer, in which he seemed to suggest that a deal to buy Yahoo's search business, if not the entire company, would still make economic sense.

But as Yahoo continues to flounder amid a worsening economy, Microsoft may view the company less as a hostile takeover target, and more as, well, lunch.

Comments

[TashNYC:]

Microsoft will wait to see if the Yahoo-Google deal gets turned back by DOJ. There is a $250 mil payout clause in that deal, payable if Yahoo gets acquired within 2 years after the deal is done. So Yahoo is cheaper if DOJ nixes the Google deal.

2008 Oct 24 07:31 AM

[Josh Thompson:]

Yahoo! will have to approach MSFT or the concern would be the deal would be too hostile to workout in the end.

2008 Oct 24 11:07 AM

[thannagan:]

If you want ot see hostility, look into a Yhoo board meeting, or employee lounge.

2008 Oct 24 11:12 AM