Software giant Microsoft (Nasdaq:MSFT) walked away from its bid for search company Yahoo (Nasdaq:YHOO) over the weekend to top off what has been a bizarre tug-of-war over the last few months. The shares have dropped dramatically as the deal, which boasted a big premium for Yahoo's shareholders, has been taken off the table. The news surrounding the spectacle still has many unanswered questions, but it seems certain that Yahoo made a bad move by making it difficult to get the deal done.
Background of the Bid
This has been a contested battle, but it never came to blows. Microsoft announced its desire to purchase Yahoo for $31 per share on February 1, 2008. The bid represented a 62% premium to Yahoo shares that were trading at $19 at the time, and immediately sent the depressed stock soaring to just under $30. It also seemed to rescue Yahoo CEO and co-founder Jerry Yang from his inability to create value in the stock.
Despite this good news, Yahoo seemed insulted by the bid and claimed that Microsoft's offer significantly undervalued the company. How dare Microsoft pay only 62% higher than what the shares were trading on the open market? And as I have pointed out before, if Yang is right about the bid being too low, it was just a further condemnation of himself as CEO. The man was obviously very smart and successful in founding Yahoo, but clearly does not have good management skills if the stock is trading this far below its fair value. The war continued until Microsoft CEO Steve Ballmer got fed up and penned a letter to Yahoo in the beginning of April stating that Yahoo should accept the bid by this past week or Microsoft would enact a hostile takeover.
No Hostile Bid, But Plenty of Hostility
Apparently the threats have been just that. After repeatedly saying it wouldn't raise its bit, Microsoft upped the ante $33, which would have been approximately a 70% premium above the February 1 closing price. Yahoo still was not satisfied, and it is reported that the board wanted $37 for the stock. The deadline came and went and Microsoft withdrew its bid over the weekend. As a result, on Monday, the shares closed down 15% at $24.37 from a close of $28.67 on Friday.
The shares gained a little bit during the day, from opening at $23.02, and frankly I am surprised that they are not lower. Remember, the company was trading around $19 before the deal was news.
This all amounts to a bad situation for Yahoo shareholders; $33 seems like a very fair price for the stock - I even thought $31 was good. Now shareholders have back a dwindling stock, and more reasons to be angry with the board and Yang. If the deal shows no signs of resurrection, look out for the lawsuits. (This one fell through, but if you are looking for other possible targets, check out Trademarks Of A Takeover Target.)
Side Deals Fall Flat
The hope is that maybe this was a just another ploy by Microsoft and Ballmer. It could be, but it still marks a bunch of foolish moves from Yahoo management in my opinion. If the bid is truly off the table for good, the company will return to trading on its core fundamentals, which before April were causing the stock to slump lower and lower. Yahoo has tried to work out deals with News Corp. (NYSE:NWS) and Time Warner (NYSE:TWX), but everything on those ends has fallen flat it seems.
The best prospective deal Yahoo has been working out lately is its ad deal with Google (Nasdaq:GOOG). This deal will help, if it works out, but I highly doubt it will be worth $5 per share to Yahoo's stock. Shareholders should hope that there is still some possibility for the Microsoft deal, because a combined Microsoft-Yahoo would pose a better competitor in fields when it goes up against Google. Many questions remain as a result of this news. Will Ballmer come back to the table? Can Yahoo's management show that the shares are actually worth more than the offer? And what will Ballmer do with the billions he was looking to spend on Yahoo? All of these are unclear, and will be revealed in due time. Right now the fate of Yahoo's shares is very uncertain. (For reading on the advantages of smart, aggressive companies, see Competitive Advantage Counts.)
The Bottom Line
Microsoft is backing away from its $33 per share bid for Yahoo. Yahoo shares dropped on the news, but will likely go even lower if it becomes clear that there is no hope of Microsoft returning with its checkbook. The fate of Yahoo's stock is murky, and I would stay on the sidelines as this whole situation has been very unpredictable.