May 5, 2008 / 12:21 PM / 11 years ago

UPDATE 3-Yahoo shares drop, investors seek Microsoft return

(Adds Yang’s blog, investor quote, analyst comment)

By Tiffany Wu and Michele Gershberg

NEW YORK, May 5 (Reuters) - Yahoo Inc’s YHOO.O shares tumbled on Monday as investors punished the company for rejecting Microsoft Corp’s (MSFT.O) $47.5 billion bid, though the fall was cushioned by hopes a deal may still be possible.

Shares of Yahoo fell as much as 20 percent in early Nasdaq trading before recovering some to trade at $24.47, still down 14 percent and far below the $33-per-share Microsoft offer.

“I think at $24, the stock’s overvalued as a standalone Yahoo,” said Mike Binger, a fund manager at Thrivent Financial, which owned both Yahoo and Microsoft shares. “I think $33 was fairly generous for Yahoo and if Yahoo won’t accept it, they (Microsoft) did the right thing in walking.”

Microsoft Chief Executive Steve Ballmer withdrew the bid on Saturday after talks collapsed, with Yahoo CEO Jerry Yang demanding $37 per share.

Shares of Microsoft rose 0.5 percent on investor relief that it was not overpaying for Yahoo, though concerns remained about how the software maker would develop its Web strategy in the face of a dominant Google Inc (GOOG.O).

“We did like the idea of the Yahoo acquisition in the long run for Microsoft, but we did have reservations about how high a price they were willing to pay,” said Dan Davidowitz, a portfolio manager at Polen Capital Management, which owns Microsoft and Google shares. “I’m not necessarily certain that the Yahoo deal is completely off the table.”

One clear winner from the collapse of Microsoft-Yahoo talks is Google, whose shares rose 2 percent. A deal would have been one of the biggest mergers in the technology sector and may have threatened Google’s steady expansion on the Web.

“The terminated Microsoft-Yahoo negotiations eliminate the risk for now of a stronger online advertising competitor to Google,” Stifel Nicolaus analysts George Askew and Scott Devitt wrote in a research note.

SHAREHOLDER PRESSURE

Analysts expect a flurry of shareholder lawsuits against Yahoo, even as the Web pioneer pursues possible deals with other Internet media and advertising companies, such as Time Warner Inc’s TWX.N AOL Internet division.

But Yahoo’s share fall was not as steep as the 30 percent plunge anticipated by some analysts, indicating there was still an “acquisition premium” built into the stock.

At $24.47, the stock is comfortably above its Jan. 31 close of $19.18, before Microsoft disclosed its unsolicited offer.

“This is going to play out over the next several months and there is still a chance Microsoft will buy the company for somewhere around $33 a share,” said Todd Dagres, general partner at venture capital fund Spark Capital. “What Microsoft is hoping is that Yahoo shareholders get militant.”

Yahoo is likely to push for a search advertising deal with Google, sources familiar with the matter said. That should boost Yahoo’s operating performance in the near term, but runs the risk of regulatory scrutiny over an alliance between the Internet’s top two players.

Already, some Yahoo shareholders have started to make their discontent public.

Bill Miller, a portfolio manager for Legg Mason, Yahoo’s second-largest shareholder, told the New York Times in a Sunday interview that he would have considered selling to Microsoft for $34 or $35 a share.

While that was more than Microsoft’s offer, it was less than the $37 per share Yahoo’s board insisted on.

Yang, a Yahoo co-founder who owns about 4 percent of the company, was expected to hold a meeting with employees on Tuesday in an effort to reassure staff in the wake of the Microsoft talks ending.

Yang said in a post on the company’s blog on Sunday night: “No one is celebrating about the outcome of these past three months ... and no one should. We live and work in a competitive world and the Web is only going to get more competitive. Executing on our strategic plan is what matters most.” (Additional reporting by Muralikumar Anantharaman in Boston; Editing by Derek Caney and Braden Reddall)

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