What Happens If Microsoft Walks Away from the Yahoo Deal?

Would Microsoft (MSFT) CEO Steve Ballmer actually walk away from the company’s bid for Yahoo (YHOO) rather than deal with the stresses and risks of making an unfriendly offer? It’s certainly possible. On the company’s post-earnings conference call last night, Microsoft CFO Chris Liddell said that if Yahoo does not agree to the current deal before the weekend, it would reconsider its options, which including going hostile or walking away.

In a post this morning, Henry Blodget asserted that there is a 60% chance the company will now walk away. So what would happen if they drop the offer?

• Yahoo shares would likely drop below $20 a share, back where they were before the MSFT bid. At that point, the stock already included at least a partial takeover premium; there had been widespread speculation that Microsoft might attempt an acquisition. And remember that the company has continued to lose market share in search, and the economy has since deteriorated. It’s possible the stock could go as low as $15. That would be a 43% drop from today’s price.
• Microsoft shares would likely stage a modest rally; the disappointing March quarter results will muffle any rebound, but I would not be surprised to see the stock gain a couple of bucks.
• Jerry Yang will have won a Pyrrhic victory. He will have fended off Microsoft, and in the process cut the value of his shares to roughly half what MSFT would have paid if Yang had agreed to a friendly deal. He will be faced with some unhappy shareholders and, I would suspect, considerable litigation.
• Steve Ballmer will be left to figure out a new plan for bulking up his company’s online business; do not be surprised if they end up buying AOL from Time Warner (TWX), and maybe even MySpace from News Corp. (NWS).
• Google’s (GOOG) Eric Schmidt can hold a celebration; his two key rivals will have been weakened after weeks of struggling over an unsuccessful deal. It is possible he will continue to pursue a deal to provide ads to Yahoo, but it seems unlikely such an arrangement would win regulatory approval.
• For large Yahoo holders, the prospect of MSFT walking would either be a huge buying opportunity, or a disaster, depending on your perspective. Legg Mason’s Bill Miller was quoted in the Journal a few weeks ago saying he would simply buy more stock if Microsoft walked and the shares tanked. Maybe he’d do that, but in the interim his fund’s performance would suffer the consequences.

Today, Yahoo shares are down 94 cents, or 3.4%, to $26.36, the lowest level in a month. Microsoft is down $2.07, or 6.5%, to $29.73. Google, by contrast, is holding its own.

Comments

[blackbody:]

why would anyone need/want AOL?

2008 Apr 25 04:03 PM

[Theodore De...:]

I think you're absolutely right, YHOO would fall back under $20. I can't wait to buy some Puts and cash in if the deal falls through!

2008 Apr 25 06:20 PM

[jeff a:]

Even if the deal goes through you'd have one big failing web portal instead of two smaller ones.

2008 Apr 26 07:38 AM

[Donald Johnson:]

Most mega mergers fail. Buying YAHOO is such a big risk when the online business models are changing so quickly. Why wouldn't MSFT sell its online buisness and buy some smaller businesses that it could grow into industry leaders? Why not invest its billions in developing a modern operating system?

2008 Apr 26 08:35 AM

[Robert DiAl...:]

I think that Yahoo is in a tight spot. If they mess up the acquisition look out below.

2008 Apr 26 08:49 AM

[martyg:]

yahoo is doing msft a favor by not rolling over. the merger would be a disaster as msft doesn't know how to integrate anything. money alone can't do it. in this case the price is large enough to affect even the great msft's balance sheet.

2008 Apr 26 11:10 AM

[whisperonth...:]

Visualize Yahoo and the blue screen of death... take that either way, since no one really knows which will happen. In fact, maybe both will do fine separately, or maybe they would do well together. Just visualize...

2008 Apr 26 12:44 PM

[User 74911:]

Msft has 40 billion to spend on yhoo? OK. Here's my suggestions:
run, don't walk away from the deal. take a few billion and start a separate unit to focus on wireless web search, entertainment, etc. a few billion more on an alliance, merger, or purchase of a wireless provider. set up a network for mobile computing.
get the young turks in there to run it.
the future is the convergence of all things mobile.
will it happen? no. why? ballmer's hubris. by the way, where is gates in all of this? why no public comments?

2008 Apr 26 02:11 PM

[atauber:]

MSFT has become a big old elphant with a lot of money but not knowing what to do with it if they buy Yahoo it is simply two old people geting married and losing the money to pay for docter fees

2008 Apr 26 06:51 PM

[Blodget ???:]

Why are you even listening to Blodget? He's been proven to not speak for your benefit, but rather his own. Its time these wall street crooks get real punishment than a mere slap and a 'be a good boy'.

2008 Apr 26 07:42 PM

[User 159379:]

you are a doosh bag. no way microsoft bails out, by tuesday this is a done deal at $31.50..

2008 Apr 26 08:50 PM

[NotVerySmart2:]

Now I know the deal wo't go through. If Barrons says it will, then it's a garunteed miss. I'll point out thier take on POT (Potash) and other ag's a few weeks ago being overbought, then watching the stock go up another 28%. YHOO deal takes another 3 months to complete and YHOO tanks in the mean time. As a business owner myself, I know exactly where Yang is at. This is his baby and he's not going to let anyone take it away, especially not forcefully. At this point the big egos and emotions are in play. Short YHOO, buy GOOG.

2008 Apr 27 08:09 AM

[mojobeta:]

MSFT/Ballmer are surrounded right now by their banker(s) in a frenzy. They will surely presuade MSFT to do a deal and it will likely be announced within two weeks. I would suggest owning some short term calls on YHOO and VCLK although AOL is admittedly a possibility. A minority deal with Baidu also cannot be ruled out.
Mojobeta.

2008 Apr 27 11:44 AM