Microsoft's Proxy Bid for Yahoo is a Bluff

Microsoft (MSFT) is talking about launching a proxy bid for Yahoo (YHOO). They (and their bankers) know that this is a bluff and would not succeed. The reason? In a word, arbitrage.

The current stock range of $29-30 does not represent a significant discount to the current bid on the table (and, due to the stock aspect of the current bid, depending upon Microsoft's stock price, it actually could represent a premium). Now, place yourself in the shoes of a large institutional investor in Yahoo.

You own shares. Lots of them. You have a couple of choices:

1) Hold on to the shares in anticipation of a long proxy battle with the purpose of voting "Yes" to the deal. This course of action would get you....$29 to 30 for your shares. This course of action does not present upside (assuming that the proxy is determined to succeed) because the stock price is determined by the deal. And, the current arbitrage is minimal, i.e the stock is trading close to or above the deal value.

2) Sell your shares right now for...oh, wait....$29 to 30. No lengthy battle.

Why would any institution choose option 1 instead of option 2? The only way would be if they intend to try and get more from Microsoft for their shares...in which case, they would vote NO to the deal.

Now, as the institutional investors capitulate, new investors are buying in at...$29 to 30 per share. Do you think that they would vote yes to a deal that values their shares at $29-30 per share? I wouldn't.

So at such point in time that a proxy vote takes place, the only shareholders still in Yahoo will be those that would vote NO. The current stock price does not represent enough of a discount (or any possibly) to the deal terms for any investor to stay in the stock in order to vote yes.

Disclosure: Author is a YHOO shareholder

Comments

[oceandude:]

No, I think this logic is flawed. No one is selling now because of the possibility of a higher deal, but if the proxy bid fails the stock will drop like a rock. Not only will Yahoo be sued but also those large institutional investors themselves.

It's simple. They can currently hold on and MAYBE get more. If MS is not bluffing about the proxy battle, worst case they vote pro-MS and get the $29/share. If they sell now, yes they get the same amount, but they lose the possibility of the few bucks a share MS might throw at Yang to save him face.

In other words, sell now: definitely $29/share. Hold and vote MS: definitely $29/share and maybe more. Why wouldn't you choose the latter?

2008 Feb 21 10:59 AM

[devils advo...:]

because institutional investors have different agendas. If they hold onto a stock with potentially no upside over a longer term period, they get hurt. The proxy battle and will not be completed until June-July, meaning with antitrust approval this deal does not get consumated until Q4 2007. Now, couple this with the fact that many of these same institutional investors are in MSFT, it comes clear that their investment in Yahoo is a longer term one with two possible outcomes under your scenario.

1) the proxy goes through at current prices and these shareholders have tied up their money for 8-10 months with no upside.

2) miscrosoft increases their bid during this process, and the incremental gains they make in yahoo is offset by losses in microsoft. Again, with a 8-10 month capital tie-up

2008 Feb 21 11:05 AM

[devils advo...:]

sorry, meant Q4 2008. At the earliest

2008 Feb 21 11:06 AM

[oceandude:]

But investors must also realize that the longer this drags out the less Yahoo is worth. MS wants Yahoo's engineers but these folks are certainly leaving steadily the longer this drags out. Plus Google must love this distraction (that reminds me - need to buy some Google).

I do agree that MS and Yahoo will offset each other for institutions owning both. It is logical then that they should vote towards whichever stock they have a bigger interest in. Own more Yahoo? Vote takeover. Own more Microsoft? Vote against. What are the numbers exactly?

2008 Feb 21 01:25 PM