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MicroHoo Deal Breaker: Who Benefits?

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Failure to reach agreement not without its upshots.

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Will the overall tech market view the failed Microsoft (MSFT) and Yahoo (YHOO) deal as a net positive or negative?

Shorter term, this is tough to say as we'll most likely see a nice thrust for MSFT which will help the Naz. But the sentiment on this deal not going through could also be a minor negative. However, I think the prospect of the deal going through at too high a price for MSFT would have been worse than the company choosing to walk away. Moreover, longer term I think this is solid net positive for the market as MSFT has that $35 billion plus stock pile to now spend on a host of other companies and technology initiatives.

Some reports this morning are saying this is a potential gambit and MSFT will come back. I just don't see that. I think it was more the case that the two parties, mainly MSFT, finally realized this deal was going to cost a lot more than the stated deal price. This morning shares of YHOO are trading in the $22's, which given its last solid quarter is about right. Anything in the $20-21 or lower and I'd be very interested in getting long YHOO again but I have an inkling those levels won't be available on YHOO anytime soon, if ever again.

How much pressure are the core MSFT franchises (OS and MS Office) feeling from Linux, Google (GOOG) Doc's, Openoffice.org and Apple's (AAPL) OS now that AAPL has Intel (INTC) inside?

I've contended for years that if AAPL ever released its OS to the world of PC's, it could very quickly grab 10-15% of the market or more. This prospect, while still remote, is much less so today now that AAPL's OS is written for the INTC architecture. If AAPL ever did release its OS to the world, it'd be a must own stock even at the currently fairly rich price, and I wouldn't even venture a guess as to how high the stock could go on that.

Does Google benefit from this? This is a resounding yes, even if GOOG and YHOO can't commence their search partnership. Moreover, even with GOOG challenging the $600 level again, I'm a buyer on any weakness as I believe the end of this merger will be one of the catalysts that propel GOOG to something near the mythical $1,000 price level.

So what companies benefit now that this deal is dead?

  • Citrix Systems (CTXS): At this point a great deal for MSFT would be to merge with CTXS (a partner for years) and really try to help grow CTXS's load balancing franchise (NetScaler), leverage CTXS online and consolidate both companies' Virtualization product offerings. A combo of XenSource and the MSFT's offering could offer a compelling challenge to VMWare (VMW).

  • Omniture (OMTR) and ValueClick (VCLK) just became more valuable as Aquantive and DoubleClick were the last companies in this space to be taken out. The field is thinner now and the recent reports that GOOG and YHOO just posted show that web growth is far from dead.

  • Lastly, a host of Salesforce.com (CRM) and/or procurement related software companies could become targets for MSFT. Names like Rightnow Technologies (RNOW), Epicore Software (EPIC), Ariba Inc. (ARBA) and Ultimate Software (ULTI) could find themselves in the cross-hairs of MSFT growing cash hoard.
Position in MSFT, GOOG, CTXS, OMTR, VCLK

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