Yahooed; The Price Is Wrong

Yahooed - as in… You’ve been 'Yahooed.' This is what happens to investors when the their stock price gets hammered by someone being greedy. And by 'someone' - I mean a group of people.

It could be the Board of Directors who, for whatever reason believe they are acting in the best interest of shareholders. In case you own Yahoo (YHOO) right now, you might want to know whom to blame, so here is where you can start - the Yahoo Board of Directors:

• Jerry Yang, CEO, Chief Yahoo and Director
• Roy J. Bostock, Chairman of the Board
• Ronald W. Burkle, Director
• Eric Hippeau, Director
• Vyomesh Joshi, Director
• Arthur H. Kern, Director
• Robert A. Kotick, Director
• Edward R. Kozel, Director
• Mary Agnes Wilderotter, Director
• Gary L. Wilson, Director

Shortly after the MicroHOO deal was proposed in early February, I wrote this post and asked…

I get a kick out of Yang and the Yahoo board. I know they are just trying to negotiate a higher price but consider that maybe Microsoft tells them to forget it. What will the board conclude then is the best interests for stockholders?

So Monday morning, when the market has a chance to “revalue” YHOO, I am looking forward to hearing how the Board was just looking out for shareholders when it tried to play hard to get.

Except for Microsoft’s (MSFT) offer, this stock has gotten hammered by failed optimism and mismanagement over the last several years while Google kicked its ass. On Monday, investors will get to experience that all over again.

Outside the Board of Directors, there are others who have “Yahooed” investors. Chief among them are the big YHOO shareholders like Bill Miller of Legg Mason who owns about 84 million shares of YHOO (approximately 6% of the company) and whose position represents about 4.4% of the Legg Mason Value Trust Fund. When this deal was announced, Bill was quick to opine that MSFT would “need to enhance its offer” and that $31 was just too low to get a deal done for a company that Microsoft needed.

According to the great value investor, YHOO was actually worth closer to $40. Just Yahoo “Google” for the commentary of Bill Miller on this deal when it was announced and you’ll have a field day of seeing what it takes to get “Yahooed.” There comes a point where large shareholders overstep their bounds in pursuit of a few more bucks per share to juice their own performance and they run the risk of screwing things up. In my opinion, that happened here. The BOD listens to big shareholders like Bill and since their “hard to get” stance reflects the views of their constituents, you should not forget the impact of large investors when you get “Yahooed”.

Next on the list of groups that “Yahooed” this deal, are the arbs. I enjoyed listening to a few arb interviews this weekend where they whined about how this deal should have been done. “Live by the sword, die by the sword.” I absolutely hate dealing with the impact of arbs on most positions affected by M&A. Sometimes I am on the right side when the deal is announced and other times, it’s not pretty. As I have repeatedly written, I try to get out of the way of any transaction that has the attention of the arbs. So if a few of them have gotten hammered by playing the gap on this deal, I am enjoying it. I have great respect for the arbs and if they got “Yahooed” partly due to their own efforts, I am not broken up about it.

Lastly, I look to the group of speculators who “Yahooed” this deal. There were more than a few people that bought YHOO over the past 3 months (and even last week)betting that a deal would get done at a premium to market prices. Their optimism trying to play the buyout game probably contributed to the bravado of management. Sadly, they “Yahooed” themselves.

To all of you YHOO shareholders that were in this position prior to the Microsoft bid and who held on for a higher bid or a hostile offer, you got “Yahooed” - by the Board and by big shareholders, and by the arbs, and by the speculators and sadly, by your own willingness to hang on.

Update

After rereading my previous post about getting “Yahooed“, I realize it seems that I expect YHOO will get whacked today. While that is certainly my guess, there is no guarantee.

Over the past 3 months, many investors have gone on record as saying the fair value of Yahoo shares was above $31 and some said at least $40. Okay - put up or shut up time. It’s either “The Price is Right” or “The Price is Wrong.” Let’s see whether the market is right or the Yahoo Board of Directors or other YHOO optimists are right. Maybe Yang and some private equity biggies will offer to take the company out at $40 per share. Maybe Yahoo’s largest institutional investors who have been pushing for a few more dollars will ante up. Maybe the 11,000 + shareholders will refuse to sell for anything less than what Yang said was fair value. Maybe Google (GOOG) will just offer up a crazy deal like Yahoo tried to suggest was on the way. Maybe some other competitor will see this as a great opportunity. Maybe Microsoft will have “almost-buyer’s remorse” and apologize and increase their offer. Maybe the company will offer to make good on their claims by conducting a strange buyback program of a gazillion dollars at above market prices just to prove how right they are.

Yes, I am just being sarcastic. I don’t believe any of those things will happen soon enough or ever or in sufficient quantity to prevent YHOO from getting whacked tomorrow. But I wanted to try to be fair and say that anything is possible. All the suspense will be over in less than 12 hours. And after that, we’ll see how many people claiming they wouldn’t sell to Microsoft for less than $33 or $35 or $37 or $40, whichever the case may be are willing to sell to anyone at prices below $31. We will see who believes in Yahoo’s brand value and the company’s discounted cash flows. We’ll see who really believes in long term buy-and-hold strategies. We’ll be able to look at share volumes and block trades and later, 13-Fs to figure out what investors really did, not what they said others should do.

Comments

[ZenInvestor:]

The rumor is that the board of Yahoo would have approved at 37, but the two (already rich) founders held out for 38 a share. They made a huge and foolish mistake, and these two are big losers, and the shareholders got shafted by their shortsightedness. BUY GOOG, SELL YHOO!

2008 May 05 08:45 AM

[fxtrader07:]

good one. enjoyed reading it.
the only abjectio i like to raise is to regard Bill Miller as a "value investor" i know, there is no clear-cut definition and anyone who likes can call himself a "value investor".
i think this will be the most interesting part: at what point miller will sell out. my guess: never. but his sucessor might do in a second

2008 May 05 09:14 AM

[Ya de Madrid:]

is it possibly the time to buy? they could figure something out with google, or whatever
it just seems to be getting to the bottom price

2008 May 05 09:18 AM

[John Capozzi:]

This merger was a joe from the beginig. There is so much manipulation on Yahoo's share price by the media pushing advantage towards Microsoft side and will be looked at closely by the SE. Allibba did not like the merger from the begining and is if not the most valuable piece of property Yahoo has beause of China and its Asian connection. DO NOT UNDER ESTIMATE ALLIBBA AND SOFTBANK THE MAOR SHARE HOLDER OF YAHOO JAPAN! Allibba also has an interest in Baidu the biggest search engine in China. Now that Microsoft has pulled its bid look for much talk and support from Allibba & Softbank. Look for even a team up now i the next day of Baidu, Allibba and Softbank to make a bid for Yahoo USA in the mid 40's and this will give them access to the USA market. If funded is needed look for the Chinese Government to pitch in for a piece of the entire new company. Also look for Yahoo to now go ahead and offer 5% of their search and Add sector which in return will give Yahoo a billion or more dollars in new revenue pricing its share price at 35 at time of signing. Time Warner will sell off AOL to Yahoo for just a little 20% interest and again a very large cash infusion. Then AT&T mentioned over the weekend that they need new business to make up for the cuts in land line usage which will be replaced by wireless connection. They also need to move more into search and add and iternet users where as China and the rst of Asia is the main area of revenue which i total will be in the 100's of billions of Dollars by 2010. They have a lot of cash and easily buyout Yahoo in whole. Remember they are partners in Apple on the IPHONE and as history shows Steve obs has no love for Microsoft and also has shown interest to enter the search and add sector of business and Yahoo with its Asian connections and valuable properties there and in China would be a great combination for Apple & AT&T. This would stop Google from further movement towards their own smart phone and internet portal of its own. Mr. Balmer is going to get his head handed to him on a platter if they dont comeback and agree to the 38 dollar deal i 24 hours. Some kind of merger or partnership with a new suitor or sutors for Yahoo will be anounced in 24 to 48 hours. Microsoft has tried to enter this search and add market by buying smaller companies but they are a long place third and have continued to loss 100's of millions of dollars and it dont work for them. Plus software will be a thing of the past shortly. Companies are already giving it away for free to gain market share and enter this next generation technology. This will be a very interesting day or two.

2008 May 05 11:00 AM