Why Microsoft Should Drop the Yahoo Bid and Buy ValueClick

Shares of Microsoft (MSFT) have declined over 11% since announcing the mammoth bid for Yahoo (YHOO) five weeks ago. Investors don’t like the fact the company will be spending $44B for a slow growing, margin compressing company that doesn’t want to be acquired. Furthermore, investors know that an acquisition of this size will take months, even years to fully digest. Like a 30 foot anaconda after eating a 30 pound capybara, Microsoft will be slow moving and lethargic, allowing arch rival Google (GOOG) to become even more dominant in all things online.

Microsoft would be much better served by buying ValueClick (VCLK) at a deep discount price of just $3B or $30 per share. The $3B price tag would reflect more than a 60% premium to the current ValueClick share price and would be welcomed with open arms by ValueClick management and board of directors. This price would be a significant bargain versus the $6B Microsoft paid for aQuantive last year and the $3B that Google has bid for DoubleClick.

At $30, ValueClick would be valued at just 4 times 2008 revenues, versus the 14 multiple Microsoft shelled out for aQuantive and the 10 multiple that Google has offered for DoubleClick. Best of all, ValueClick is profitable, with 2007 net income of over $71M and over $200M in cash on their balance sheet. The cash reduces the overall price tag to just $2.8B.

Mr. Ballmer, dropping the Yahoo bid and buying ValueClick would result in an immediate $20B gain in market cap for Microsoft, enable Microsoft to become a dominant player in the online advertising space and leave Microsoft with over $20B in cash. Cash that could be used to pursue other, more accretive acquisitions.

Author has a long position in shares of ValueClick.

Comments

[tchannon:]

Can you provide more specifics to the strategic advantages of MSFT buying VCLK? I will be honest, I have VCLK shares and would love to see $30, but you do not touch on what VCLK can really bring to the table for MSFT to prompt the stroking of a $3B check.

2008 Mar 06 10:57 AM

[cameronm:]

It makes no sense for MSFT to buy valueclick. They got most of the things VCLK has when they bought AQNT. YHOO gives them the scale and platform to finally attack Google directly, which MSFT has never really been able to do on their own. Neither AQNT or VCLK lets them do.

2008 Mar 06 12:47 PM

[Mr. Wynn:]

I would love to know more about this play for both MSFT and VCLK shareholders. What kind of strategy overall does this advance? Would this give MSFT the clout and energy plus the technology to beat GOOG in the Internet advert space? Either from the author of the piece or one of the commentors. Thanks.
Ned

2008 Mar 06 05:43 PM

[Dag:]

Why buy VCLK? MSFT could buy a company called Tradedoubler #1 in affliate buisness in Europe. US market already crowded place for affliate buinsess while several countries in Europe still show good growth in internet penetration.

AOL tried to bid for Tradedloubler a year ago stock is now down by 50% since they withdraw their bid.

2008 Mar 10 12:18 PM

[eskimo:]

yahoo is going down! especially with the recent release of Bing! from Microsoft. If i had any money invested in yahoo, i would be selling those shares right now. The web is a changing!

Jun 20 02:23 PM