Microsoft would use up cash hoard on Yahoo; may pay off

By Philipp Gollner

SAN FRANCISCO (Reuters) - Microsoft Corp's $44.6 billion bid for Yahoo Inc would use up its cash hoard, but the controversial move at a 62 percent premium might pay off if the company makes its savings targets -- and then some.

The software leader's $31-per-share cash and stock offer "is very astute," Sanford C. Bernstein analyst Charles Di Bona wrote in a research note, as Yahoo's assets are worth $39 to $45 per share, much more than the offer price, if a restructuring unlocked the Internet company's full value.

Investors sent Microsoft shares down 6.6 percent to $30.45 on Friday and Yahoo's stock up 48 percent to $28.38, within $2.07 of the proposed offer price. The bid far exceeds the 35 percent to 40 percent premium typical in recent large deals.

Di Bona expects the unsolicited bid, if approved by Yahoo's board, to reduce Microsoft earnings per share in the first year of combined operations and to be neutral in the second year.

The deal will use up Microsoft's more than $21 billion in readily-available cash. "While a considerable amount of money, the deal makes strategic sense for Microsoft as it has failed to adequately monetize its brand on the Internet," Citigroup analyst Mark Mahaney said in an investor note.

Microsoft would have to achieve $1.6 billion of cost savings and other efficiencies, such as eliminating duplicative research and development efforts, for the deal to break even in Microsoft's fiscal year ended June, 2009, Bear Stearns analyst John DiFucci wrote in a research note.

That scenario assumes Microsoft generates more than $600 million in interest income and issues new shares to pay for half the $44.6 billion price tag.

Microsoft executives said on Friday they expect $1 billion in such "synergies" from the deal, which DiFucci calculated included investments in assets such as data centers.