February 1, 2008 / 10:57 PM / 10 years ago

Investors see Microsoft bid for Yahoo as generous

BOSTON (Reuters) - Microsoft Corp's $44.6 billion unsolicited bid for Yahoo Inc is generous and offers shareholders of the Internet media firm an escape route from years of sub-par stock market performance, investors said on Friday.

Microsoft, the world's biggest software maker, sent a letter to Yahoo's board on Thursday night to offer $31 per share in cash and stock, a 62 percent premium over Yahoo's closing stock price that day.

"It has been fairly proven out in the market that Yahoo is struggling as a standalone company," said Mike Binger, a fund manager at Thrivent Financial in Minneapolis, who owns both Yahoo and Microsoft shares in client portfolios.

"It would be very hard for Yahoo as a standalone entity to grow their stock to $31 in the next couple of years. From a shareholder perspective, I think it's a very fair price for the state of Yahoo's business fundamentals right now," he said.

Yahoo said its board would evaluate the offer. The company in the past few years has lost market share to powerful leader Google Inc in the lucrative Web search market, and saw management turnover in 2007.

Its shares have traded mostly below the $30 level in the past two years and dropped below $20 in January, a far cry from $125 in early 2000, at the height of the tech bubble. Google, by comparison, is up five-fold since listing in 2004.

"I would be so thankful. Someone finally put me out of my misery," Gabe Birdsall, a portfolio manager at AIM Investments, said of his likely reaction to the bid if he had stayed a Yahoo shareholder.

Frustrated by a lack of progress in its business goals and the lackluster stock performance, Birdsall's AIM Constellation Fund sold its Yahoo holdings more than a year ago, he said. The fund does own Microsoft shares.

Under Microsoft's proposal, Yahoo shareholders can choose to get $31 cash or 0.9509 common Microsoft shares per Yahoo share. The deal in aggregate must consist of one-half cash and one-half Microsoft common stock, the software maker said.

"It's a full price, but I think they want to let people know they were serious and it's going to be very difficult for someone else to come out and offer a competing bid," Birdsall said.

He said between $7 and $12 of the $31 bid price was estimated to reflect Yahoo's holdings in its Japan unit and Chinese Internet firm Alibaba.com.

Yahoo shares shot up about 48 percent on Friday to $28.38. Microsoft, which had a market capitalization of about $300 billion as of Thursday, fell 6.6 percent to close at $30.45.

Ken Allen, an analyst tracking Microsoft at money manager T. Rowe Price, said the software company's stock fall reflected the risk the potential acquisition would bring to its otherwise steady business, even though it did make strategic sense. T. Rowe is a big shareholder in both Microsoft and Yahoo.

"Microsoft is correctly acknowledging that they need to get bigger and have more scale in order to compete more effectively in the online advertising market. And obviously Yahoo is the quickest and biggest way to get that scale," Allen said.

Others expressed concern about how much Microsoft offered.

"Maybe they felt like they needed to get something done in this space but the size of this deal does not make sense for shareholders," said Pat Becker Jr., chief investment officer at Becker Capital Management, which owns Microsoft shares.

Additional reporting by Cal Mankowski; Editing by Braden Reddall

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