Microsoft/Yahoo Merger Rumors Reek of Foul Play

Includes: AABA, MSFT
by: CrossProfit

Analyst Jim Yin from Standard & Poors wrote Friday morning (May 4,2007);

According to unconfirmed reports from the Wall Street Journal, Microsoft (NASDAQ:MSFT) has re-entered formal negotiations to acquire Yahoo (YHOO). Our reaction to a proposed merger is mixed. By combining their customers and content, the merged company could better compete against Google (NASDAQ:GOOG) in the online advertising market. However, we are concerned about integration as Microsoft and Yahoo have different corporate cultures. We believe the merger does not address the gap in search-engine technology between Microsoft and Google. We think the deal would be dilutive to Microsoft's EPS.

Analyst Scott Kessler from Standard & Poors reiterated his sell rating for YHOO and wrote Friday morning;

Shares are surging in pre-market trading after unconfirmed reports from the Wall Street Journal and others indicate that Microsoft is interested in buying Yahoo. A $50 billion valuation ($35/share) has been suggested. We are skeptical. Both Microsoft and Yahoo already have signficant global reach and expansive online offerings. Their Internet businesses have struggled, we think, due largely to monetization shortcomings, which such a merger would not address. Ironically, the companies' advertising partnership ended last year; we think something similar would make more sense.

By late Friday, the WSJ had clarified that the rumors were essentially baseless.

I just saw this report now. In retrospect, we had already agreed with the S&P analysts that the Yahoo! - Microsoft merger did not make sense; all of us seem to be in sync. Furthermore, one of our analysts had posted a comment on a Yahoo! related article posted on Seeking Alpha stating that the way this information was disseminated was suspect to begin with.

We now know that the story originated from the Post and was based on old, terminated discussions. What we don't know is; 1) Why did the Post run with the story now? 2) If the Post had no ulterior motive, who fed them the story and what was their motive? 3) Based on the outcome, was the objective to bump YHOO stock or was the intention to flush out a GOOG response or reaction?

No matter how you look at this, stenches of foul play mist the air. We may never know by who and why this scenario was played out. What we will know today is if YHOO declines to its Thursday level.

Yahoo 1-yr chart


Disclosure: Written by a CrossProfit analyst and may not be the opinion of There are no conflicts of interest.