“Company’s only option to compete with Google is to acquire Yahoo, analyst says.”
San Francisco — It may have insisted time and time again that its $41.7 billion buyout bid for Yahoo is “fair”; but it seems that software giant could “raise” the offer by taking away stock component.
“Yahoo has officially rejected Microsoft’s blockbuster offer, a stock-and-cash proposal initially valued at $44.6 billion, or $31 a share.”
Citigroup has reported that Microsoft Corp.’s bid to takeover Yahoo Inc. provoked in quiet a debate over price, analysts say the software giant could sweeten the deal by taking away the stock component and turning the bid into an all-cash offer.
The bid was at first rejected, but according to the Wall Street Journal, executives from the two companies have since met to talk about the deal. No official announcements have been made by either company, however.
While Yahoo dilly-dallies for time to respond to Microsoft’s uninvited takeover bid, rumor has surfaced that it is only a matter of time before Microsoft lifts its bid for Yahoo, paving the way for the transaction to close.
“In the meantime, Yahoo also has set about on a campaign to convince investors that it is worth far more than what Microsoft is offering.”
According to Reuters, Citigroup analyst Mark Mahaney told clients in an advisory that he believed Microsoft “is capable of and willing to” increase that bid to conclude the deal.
“We believe that a Yahoo sale to Microsoft — at a price likely higher than the initial [$31 per share] bid — is the most likely outcome,” Mahaney wrote in a note to clients.
But with Microsoft’s stock going down about 11% since the proposed merger was disclosed, the deal’s value has declined to about $42 billion, or roughly $29 a share. And with the volatility in today’s market, the deal’s value could fall even further, said analyst Jim Friedland of Cowen and Company.
“One possible sweetener is to turn it into an all-cash deal,” he said. “You take a lot of the risks off the table. … If they change it to an all-cash deal, that is $31 a share no matter what happens to Microsoft’s stock.”
Mahaney further indicated that the limited combined market share of the two companies would also allow the deal to get the thumbs-up from governmental regulators.
Mahaney said Microsoft is not likely to walk off from the deal, because it has yet to formulate significant inroads in the area of online advertising, especially against market leader Google Inc., despite efforts to do so for the past three to four years. The only way Microsoft could compete with Google would be to acquire Yahoo, the analyst said.
Several analysts believe that both sides are simply posturing in a bid to get better terms in a possible merger and showing their shareholders that they are bargaining hard for more value.
Rob Enderle of the Enderle Group held that by spinning it into an all-cash deal, Microsoft could argue before its shareholders that it stuck by its guns in the negotiations; while Yahoo could claim that it got a better deal from the tech giant.
“It is a rough win-win, but win-wins are hard to come by,” he said. “Both sides could argue that they negotiated the deal favorably for their own firm.”
However, analyst Roger Kay of Endpoint Technologies Associates believed that an all-cash deal would leave a huge crack in Microsoft’s balance sheet that may give the tech behemoth pause.
“You do not want a big operation to suddenly not have much cash,” he said. “It might not be a big deal since their cash flow is really good. But it puts them in a riskier position financially than they basically have ever been.”
Mahaney held that Yahoo is forcefully following other options to Microsoft’s unsolicited takeover bid, although he doesn’t see any competing bidders for the company.
“However, one possibility is a tie-up with Time Warner, whereby Time Warner would contribute its online content assets to Yahoo in exchange for a stake. We believe this could serve as a forcing function to a higher Microsoft bid,” Mahaney said.
Citigroup also increased its price offer on Yahoo’s stock to $34 from $31, stating that the new target price reflected its belief that Microsoft would increase its bid for the company.
“We think the strategic value of Yahoo to Microsoft is very significant,” Mahaney said.
“And it is this that could drive Microsoft to raise its offer.”
Also, rumors of a possible buy-out by Rupert Murdoch’s News Corp. were blown out of the water by the media mogul himself, and all has gone quiet on the Google front — with which Yahoo’s execs were suggested to be having tie-up talks.
When contacted for comment, a Yahoo spokeswoman said, “Yahoo’s board and management team are carefully evaluating all of the company’s strategic alternatives and will pursue the best course of action to maximize long-term value for shareholders.”
But, regardless of Yahoo’s best efforts, Citigroup still views a Microsoft-Yahoo deal as the most likely outcome.