Why Capital Research Mgmt Doubled Its Stake in Yahoo!

When we conducted our own analysis of the shareholders that owned both Microsoft (MSFT) and Yahoo (YHOO), we concluded that ultimately, they would be in favor of a higher YHOO.

Some said “not so” - because major institutional investors would lose out more on their MSFT stake than they stood to make on their YHOO shares.

How short-sighted. Friday, Valleywag commented:

At Capital Research & Management, an investment management firm and longtime Yahoo shareholder, media-savvy stockpicker Gordon Crawford has raised its stake in the company to more than 16 percent, from $4 billion to $6 billion at current prices, some time in the past three months. The stock’s chart strongly suggests that his buy came after Microsoft’s bid sent Yahoo shares soaring. What that means: Crawford believes Microsoft will succeed in its bid for Yahoo, but only after raising its price. That’s a fair turnabout from his earlier concerns that a higher price for Yahoo would mean losses from his firm’s stake in Microsoft that outweighed gains from its Yahoo position. Capital’s huge bet on Yahoo means that CEO Steve Ballmer’s hand is weakened in resisting calls to up Microsoft’s offer.

I am not sure on that conclusion at the end, however.

What I reiterate is the following, alone:

• MSFT will remain in a rut, trading between $30 and $40 and not beating the market over time (ie. it might go above $40 but the rate of return relative the market will be inferior).

• YHOO will remain a poor man’s stock as Google (GOOG) continues to outgrow it.

But combined, Microsoft/Yahoo/aQuantive(AQNT)/etc. becomes a $400B machine. This is why a savvy media investor such as Gordon Crawford would double his stake in YHOO. In other words, yes, MSFT could very well end up paying a bit more for YHOO, but it’s not because it has to, it’s because it’s best for all parties to consummate this deal and focus on business… which is something that becomes impossible in deal purgatory.

Disclosure: Long YHOO. Used to think this deal would get done at $50B, but with YHOO’s missteps, I now figure it might be at $44.6B - $50B, closer to $45B. We shall see.

Comments

[timemachine]

Will Microsoft survive and prosper without Yahoo? Da! How about Yahoo without Microsoft? Survive? Probably. Prosper, probably not! It's an age old story, the richer get richer and the poor...well they continue to be poor.

I have owned both stocks in the past. Lost money on both of them. I would guess $10,000 or maybe a bit more. (So much for me being an intelligent investor.) I don't own either now, although I do have ten April call contracts on YHOO. I think this deal should be done. I don't care at what number, but in the very best interests of both companies employees and customers, it should be done.

[b1955c]

i came to the same conclusion, allthough different reasons, last week. this deal is setting up to be a litagators dream due to the human failings of ego and stubborness. clearly the best move for both companies is a merger. in the meantime,goog, can sit back and laugh.

[John Capozzi]

THIS MERGER SHOULD CLOSE ANYTIME NOW. I BELEIVE MICROSOFT WILL RAISE THEIR BID 35-39 AND THIS WILL CLOSE IT IN A DAY OR SO. MICROSOFT HAS NOW OTHERS TO WORRY ABOUT NOT INCLUDING THE TIME BEING LOST BECAUSE THEY HAVE NOT CLOSED THIS MERGER YET BUT OTHERS ARE NOW STARTING TO LOOK AT YAHOO FOR ITS VALUABLE PROPERTIES AND YAHOO IS NOT WAITING. AGAIN EXPECT DEAL TO CLOSE IN A DAY OR SO. IF NOT A AOL AND YAHOO MERGER IS GOING TO HAPPEN BY FRIDAY. TIME IS RUNNING SHORT.

[bato sa bato]

Mr. Steve Ballmere and company miscalculated their bluff on Yhoo. It backfired! Good for Yhoo. Since the beginning Msft knows it has to raise its bid. They're hoping that they can get Yhoo for a steal. Well, we've seen each players cards and the outside wagers are betting that msft is going to pony-up more to get whta they want, SURVIVAL.