Doubling Down on Yahoo Stock: Double Smart, or Double Dumb?

Capital World Investors disclosed Thursday that it now holds more than 10 percent of Yahoo (YHOO) shares, or 135,542,600 shares, up from 69,647,000 on Dec. 31.

Roughly speaking Capital World Investors doubled down, according to a filing with the Securities and Exchange Commission. News.com’s Dawn Kawamoto speculates that perhaps Capital World had an inkling about Microsoft’s (MSFT) bid. Perhaps, but Capital World Investors had a relatively brief window to build up its position to make a killing.

In January, Yahoo shares were roughly hovering at about $20 with a few spikes above $23 and a few below $19. After that Yahoo spiked to roughly current levels.

Capital World Investors doesn’t have to disclose its average cost per share, but a price in the mid- to high-$20s is likely. Consider:

• From Sept. 30 to Dec. 31, 2007 Yahoo shares had an intraday high of 34.08 and a low of 22.80. Most days were in the 25 to 27 range and Yahoo shares only broke the $30 mark for a few days before falling back.
• From Dec. 31 to Mar. 31 Yahoo shares had an intraday low of $18.58 and a high of $29.75. If the investment firm invested in Yahoo in January it is sitting pretty on its holdings. If the firm doubled down following the Microsoft bid its cost basis would like still remain in the mid- to high-$20s.

But the bigger picture is this: Capital World Investors is pretty damn sure that Yahoo will get taken out for at least $31 a share. With that perspective Yahoo shares are easy money. All Capital World Investors needs is $1 more than its average cost basis and it pockets more than $135 million. It’s safe to assume that Capital World Investors has a lower cost basis than $30.

So what can nuke Capital World Investors’ seemingly infallible plan? Microsoft could walk. If Microsoft walks, Yahoo shares could quickly head underwater for Capital World Investors. What about AOL? No one is going to get excited about an AOL-Yahoo deal. Let’s just say the braintrust at Capital World Investors will be watching Microsoft CEO Steve Ballmer very closely. Millions of dollars will ride on what Microsoft chooses to do with its Yahoo bid. Doubling down looks brilliant today. It could be doubling dumb tomorrow.

Comments

[James Z]

You are totally wrong. If Microsoft can compete with Google without Yahoo, please walk away. Microsoft will stay at the same ground or disappeared when Google dominates the whole online world.

[Stock Miser]

User, the real question is this: CAN Microsoft compete with Google? Obviously, independently, Microsoft doesn't think it can. The days of computing as exclusively desktops and laptops built around an operating system technology that is sub-par at best is all but over. Linux is rapidly gaining market share from Microsoft, and Microsoft is obviously nervous about that. Much of this is stuff Bill Gates as much as said when and before he left the head honcho position of Microsoft in different hands.

As of right now, Microsoft is a software company not capable of extending its position into the new world of technology. Yahoo would clearly help it gain that much needed foothold. For Microsoft, this is basically a sink or swim proposition. If they succeed (and I hope they don't as I'm no fan of their "squelch anything not created by us" philosophy) they will be well positioned for the world of the internet and advertising age. If they fail, they will be left behind in the age of the desktop where the desktop is actually losing out to smaller and more precise technological solutions for everyday problems. (Can you say Blackberry or Palm? Windows CE has tried and failed to compete with both products.)

So yeah, I guess I have to say that Microsoft needs this deal to go through for it to survive as a software company. Microsoft can't afford to lose here.

How about Yahoo? Well, they've struggled a lot over the last few years trying (wrongly, I think) to compete with Google. Yahoo was never really a Search company. Sure, they started life that way, but they gradually grew away from that to be more of a "community building" company. Yahoo Groups, Yahoo Calendar, Yahoo Mail, etc. What does Yahoo have to gain from being taken over by Microsoft? Seems to me not much other than a few extra bucks to Yahoo shareholders. Does Yahoo really want to sell out for that?

So Microsoft isn't going to walk, and Yahoo isn't going to sit there and roll over and play dead. The survival of both companies is collectively at stake. The one who wins this battle may be at the forefront of the future of technological advances. The loser will join the dinosaurs in the land of extinction.

As to the investment by Capitol World Investors, they are obviously hoping that Microsoft will up its ante until Yahoo can't help but say yes. How much would that cost? $30 a share? $50? $100? Seems like a safe bet to me. Microsoft, as I said, can't afford to lose, so betting on Yahoo is probably going to be easy money for them. All Yahoo has to do is say "no" and watch as the offer prices increase, or watch as Microsoft falls flat on its face with a much stronger (hopefully) Yahoo still standing.

[steveballmer]

This Jerry Yang guy is really standing up to me! My letter to Yahoo did not scare him or his board at all!
He sent back this response:
"We continue to believe that your proposal is not in the best interests of Yahoo and our stockholders," read the statement.
He called me a liar several times:
"Contrary to statements in your letter, stockholders representing a significant portion of our outstanding shares have indicated to us that your proposal substantially undervalues Yahoo."
Then he got mean:
"We consider your threat to commence an unsolicited offer and proxy contest to displace our independent board members to be counterproductive and inconsistent with your stated objective of a friendly transaction,"

This guy has really got moxie! Too bad I'm going to have to totally destroy him!
By the time I'm finished with him, he will be eating spam and living in a cardboard box!

Mark my words people! I will have Yahoo, even if I have to destroy it!

[ColdFriction]

IS it possible that sneaky old Steve Balmer is mopping up support by encouraging friendly investors to increase stake in Yahoo for the ultimate Proxy fight??

Having kept its arrogance to its technology for the most part of the new Millenium - it looks like the emergence of Steve Balmer's true self will ultimately either upset the shareholders or push Yahoo to another Netscape like disaster. Steve's behavior is like the high school bully who tries to piss on the girl's dress when refused to go to the prom dance.

The question should not be whether the bully can ultimately win - it should be whether Yahoo can thrive on its own- looking at its savvy investment history ( in addition to being No 1 in ,most of its areas ) - China, Japan and its original stake in Google- along with its still dominant role in attracting and retaining its visitors- the answer is a resounding YES- it is a matter of a few quarters for Yahoo to capitalise on its monetizing strategy.

Steve - Dont you learn from what the EU did to you? Tone down your arrogance and step aside.

[Bill D.]

I'm confused - seems everything I read and hear is the majority of Yahoo owners are in favor of the deal and MSFT folks just want it settled.