Yahoo! Rejects Microsoft's Offer, What's Next?

Yahoo! Inc. (YHOO) may have rejected Microsoft's (MSFT) $45-billion offer on Monday morning, but Citigroup analyst Mark Mahaney remains convinced a deal between the two tech giants remains very likely.

In a note to clients, Mr. Mahaney said:

It's the Board's job to extract maximum value, and Microsoft's 62% bid premium was on a 4-year low stock. Also, Microsoft paid very high valuations for aQuantive (30X EBITDA) and for its stake in Facebook.

He added that Microsoft's stated $1-billion synergy goal for a Yahoo takeover translates into a "reasonable" 15 to 16 times EBITDA multiple on a $40 per share bid, which is more than $9 higher than Microsoft's current bid.

Given Microsoft's stated commitment to building market share in online advertising, the analyst told clients an increased bid for Yahoo! may be the only option for the company.

Despite 3-4 years of making online advertising a key strategic priority, Microsoft has yet to demonstrate traction – its share of U.S. online advertising was flat to slightlydown in '07 (7.5% vs. 7.6% in '06) with $1.5-billion in operating losses over the past two years.

Mr. Mahaney told clients the odds of a successful competitive bid are very low with the biggest risk to an eventual Yahoo! sale to Microsoft being a Yahoo!-Google Inc. (GOOG) search outsource deal.

Comments

[Tom B:]

So--I'd like to be hearing from institutional investors with lots of MSFT. Are they doing ANYTHING to prevent this train-wreck? I don't mind if MSFT goes bye-bye, in fact, it would be great. But, I'd hate to see Yahoo die.

2008 Feb 12 09:47 AM