RBC Analysts: Stay Long Yahoo As Its Possibilities Grow

Testing search ads for Google Inc. (GOOG) and merger negotiations with News Corp. (NWS) and Time Warner Inc.’s (TWX) AOL unit are just some of the ways Yahoo! Inc. (YHOO) management is trying to expand the range of possible alternatives to Microsoft Corp’s (MSFT) $42.4-billion takeover bid in an effort to get more for its shareholders. Meanwhile, News Corp. is reportedly in negotiations with Microsoft to join in its bid.

Is it clear than leaks to the press have become a major factor in these negotiations. So much so, that even seemingly unrealistic options are rumoured to be on the table.

As for what is known, the outsourcing deal with Google has a net benefit for Yahoo of around $500-million, or $5-billion in enterprise value and roughly $5 per share, according to RBC Capital Markets analysts. Yahoo was trading under $19 per share before Microsoft’s bid emerged, while the cash and stock offer is worth around $29 these days. So Yahoo is essentially trying to make the case that half of the remaining premium between these two prices could theoretically be matched instantly, the analysts said in a report.

But such a deal would mean that Google controls close to 90% of U.S. search volume and nearly all of that in Europe. Microsoft would probably object and the regulatory process would not only be lengthy, but uncertain as well.

As for an AOL-Yahoo tie-up, RBC thinks shareholders would likely reject such a deal and the integration would be messy. Then there is the option of a joint venture between Microsoft and News Corp.’s MySpace. But RBC said the valuation for such a deal would unlikely provide as good a valuation as a higher offer from Microsoft alone could.

This combination would be highly complex as it would involve nearly every major Internet player in a complicated set of relationships: MSFT owns a 1.6% stake in and has a commercial relationship with Facebook, which competes directly with NWS’ MySpace, which has a guaranteed search deal with Google, which competes directly with MSFT and Yahoo in search/display.

They added that integration risk would again be significant.

So what do these analysts suggest is the best way to play all of this. Simple, stay long Yahoo, since a higher bid from Microsoft is considered the most probable outcome. And they don’t think the software giant will walk away.

Comments

[Silicon Ollie:]

So, none of the alternatives to a Microsoft buyout of Yahoo is at all likely, but "a higher bid from Microsoft is considered the most probable outcome." That sounds like wishful thinking by Yahoo shareholders. Why would Microsoft bid against itself, especially when Yahoo's desperation is so transparent?

2008 Apr 13 08:25 AM

[tillman:]

It is a ridiculous notion that MSFT is bidding against itself. This is not an auction. This is a bargaining table. There is a very big difference between auction and bargaining. In auction, the seller doesn't have any say about the price after minimum price requirement has been met. Thus, a buyer can't bid against itself. But, in bargaining, there IS NO BID. It is simply a process in which the buyer offers the price and the seller would accept it if it is acceptable to him/her. If rejected, the obvious next step for the buyer is to increase the offer or go take a hike.
This is an unsolicited offer to acquire a company that was not for sale. So, unless MSFT is willing to pay enough money to satisfy YHOO board/shareholders; I don't see this deal going through. Now, I can't speculate on the numbers but, at this point; it seems to be higher than $31 per share.

2008 Apr 13 11:00 AM

[Silicon Ollie:]

That primer on auction procedure is really helpful!

The time when Yahoo could be described as "a company that was not for sale" is history. Yahoo is the one trying frantically to induce other bidders to the auction, to little avail. Bargaining is difficult when you don't have any chips.

2008 Apr 13 12:57 PM

[James Z:]

I totally agree with the author. We have to remember why Microsoft buys Yahoo in the first. It's simple: Mｉｃｒｏｓｏｆｔ　can't ｃｏｍｐｅｔｅ　ｗｉｔｈ Google. They can choose to walk away from the deal. Guess what, they are going to watch Google taking over the online world and eventually faces the same fate as Yahoo has now.

So raise the bid and work friendly together with Yahoo to find the common enemy.　

2008 Apr 13 01:38 PM

[James Cullen:]

While I understand the gist of the article, I think the notion of expanded possibilities being good for Yahoo is ridiculous. This is a company - specifically a management team - that needs fewer choices, because they've proven inept at handling their core business.

2008 Apr 14 11:38 AM

[Tom B:]

"- that needs fewer choices, because they've proven inept at handling their core business."

less inept than MSFT at handling theirs.

2008 Apr 14 12:50 PM

[bato sa bato:]

WHEN EVERYTHING IS SAID AND DONE MSFT HAS A CHOICE OF RAISING ITS BID, WALK AWAY OR GO FOR HOSTILE TAKEOVER . THE LATTER SEEMS SOOO COUNTER PRODUCTIVE. HAVING SAID THAT, 2 CHOICES REMAIN ONTHE TABLE. FRANKLY SPEAKING , I DON'T THINK SOFTY IS GOING TO WALK AWAY!! AND IGNORE DEATH LOOMING AT THEIR DOOR.

2008 Apr 14 04:41 PM

[waters96:]

Silicon Olie, no, MSFT is not bidding against itself. YHOO was not selling. MSFT approached them and offered 31. YHOO evaluated the offer, and countered with 40. So, if MSFT wants to buy YHOO in a friendly way, it must split the difference. If not, the only way to "buy" an unwilling owner is to do so in a hostile way. I don't understand why you don't understand that very simple concept.

2008 Apr 15 04:12 PM