Forget big premium as Microsoft eyes Yahoo again
SAN FRANCISCO (Reuters) - While Yahoo Inc is busy pursuing an independent strategy, forces beyond its control leave it increasingly vulnerable to a fresh takeover bid by Microsoft Corp without the increased premium shareholders once hoped for.
Microsoft's initial unsolicited takeover bid was a half-cash, half-stock offer of $31 per share, for a value of $44.6 billion. Microsoft later raised it to a $33-a-share bid valued at $47.5 billion.
Yahoo stock now rises or falls on speculation about what price Microsoft may end up paying for it. Earlier this month, as hopes of a new bid evaporated, Yahoo shares fell to $19.59, near their level in January before Microsoft began its bid.
With Microsoft back in the picture as a potential acquirer, Yahoo shares traded up above $24 a share on Nasdaq on Tuesday.
Microsoft, rebuffed by Yahoo in its original takeover bid, said on Monday it had given up on negotiating with current management but was ready to instantly reopen talks if activist investor Carl Icahn wrests control of Yahoo's board at its annual meeting on August 1.
Also conspiring against Yahoo is a further decline in the U.S. economy and the online advertising market on which its revenue depends. Yahoo can only hold back or cut costs so far before having to lower its already weak outlook again.
"All this deal speculation is happening in the space of an increasingly dicey environment in terms of adverting," RBC Capital analyst Ross Sandler said. "If Yahoo starts missing its numbers, the stock moves back to $20," he said.
Wall Street is looking for revenue to grow 11 percent but profits to fall nearly 13 percent when the Internet company reports second-quarter results on July 22.
"Financial and pharmaceutical ads are under pressure," Canaccord Adams analyst Colin Gillis said of two heavy online ad spenders. "Yahoo is going to have a lackluster June quarter with disappointing September guidance likely," he said.
Fueling concern is Monday's warnings from personal finance company Bankrate Inc, which cut its 2008 outlook, citing a sharp drop in spending on Web display ads by marketers in financial services -- a key sector for Yahoo as well.
SOMETHING LESS THAN $33?
The central issue, Wall Street analysts say, is not whether Yahoo has a coherent strategy for controlling its destiny but whether it has time to achieve its goals. Many are impressed by recent partnership deals and efforts to open up products and advertising systems, but see it as too little, too late.
Investors are back to debating what side of $30 Microsoft would end up paying if Icahn succeeds in turning over the board.
Due to the stock component, the value of that offer sank from $44.6 billion in January to below $42 billion, or about $29 a share, by May.
Microsoft's potential new bid is unlikely to start as high as the $33 a share Microsoft offered just before calling off merger talks in early May, said UBS analyst Ben Schachter.
And it's likely to be a far cry from the $34-$35 a share that major investors called for earlier this year, or the $37 Yahoo management had made as a counterproposal to Microsoft.
"I think we've seen enough time passed that you're going to have Microsoft looking at where the business is today and what they want to pay for it," Schachter said. He predicts a renewed bid from Microsoft in the $31-$33 a share range.
"The business has weakened since the original offer was made. You have both the macroeconomic environment weighing on the stock as well as all the distractions from the original bid itself," he said.
Gillis said, "The only deal that was only ever really on the table -- $31 per share in cash and stock -- is probably the one that we see get revived."
Gillis added, "In a deteriorating economic environment, an all-cash offer of $28, $29 or $30 (per share) starts to look pretty good" to shareholders who had once bet on a $35 takeout price. He too sees Microsoft reviving the $31-a-share offer.
HOW LOW COULD MICROSOFT GO?
Microsoft may be tempted to offer even less if Icahn wrests control of Yahoo in his proxy campaign to elect an alternative slate of directors in three weeks. Icahn and Microsoft have said they are ready to reopen merger talks if he prevails.
But Jefferies & Co analyst Youssef Squali warned that Icahn may have few options other than selling to Microsoft.
"If Icahn wins a full slate and he doesn't have a 'Plan B' then Microsoft has him over the barrel," Squali said.
What's to keep Microsoft from letting Icahn push out Yahoo CEO Jerry Yang and board, then swooping in with a low-ball $18 per share offer, asks Trip Chowdry, a software financial analyst with Global Equities Research in Silicon Valley.
Walter Pritchard, a Microsoft analyst at Cowen & Co, said another factor to consider is the effect on Yahoo employees if Microsoft comes in with a far lower bid, not to mention the resistance by major shareholders counting on a big premium.
"They (Microsoft) would like to discount, but I think they know it would be a lot harder to get a deal done if they were to put a significant discount on the deal," he said. "For a few billion dollars (extra), it's just worth it to get it done."
"I don't think Microsoft will pay more than what they last said they'll pay -- they'll do it there rather than at $1 or $2 less. At worst they'll pay $33 for the whole thing."
(Additional reporting by Daisuke Wakabayashi in Seattle; Editing by Gary Hill)
