The Microsoft-Buying-Yahoo Rumor Still Makes No Sense

Includes: MSFT, YHOO
by: Yankee Group

By Carl Howe

Robert Peck at Bear Stearns just won't let this rumor die. According to Bloomberg, Peck claims that Microsoft (NASDAQ:MSFT) would be interested in buying Yahoo (NASDAQ:YHOO) for $40 a share, a 76% premium over its current market price. With 1.34 billion shares outstanding, that would put the price of the deal at almost $54 billion, up about $4 billion from the last time this rumor came around in May.

I didn't think this deal made any sense in May, and making the price higher doesn't make it more attractive. Microsoft would pay $54 billion for $1.3 billion a year in revenue and $730 million in profit. In return, Microsoft shares would take a 16% hit due to dilution, to gain 27% market share in online advertising, a market dominated by Google with 65% market share. The numbers and the markets just don't make business sense.

Last time, I suggested that Rupert Murdoch may have planted this rumor to pressure Dow Jones shareholders to sell the Wall Street Journal to them. Now that that deal is done, my bet this time is that someone with a lot of Yahoo shares wants a bump in Yahoo stock so they can dump their position. Like many acquisitions, this one would stoke the egos of the executives involved, but any payoff from such a merger would take years to materialize. And with Microsoft's leadership already in doubt given its poor performance for the last seven years, investors are more likely to bolt for the exits than to wait for those results.

Full disclosure: the author has no position in either Microsoft or Yahoo, but does own stock in Google, a Yahoo competitor.