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Microsoft Panics, Overpays For Yahoo


With this offer, Microsoft has somehow decided this is the bottom for tech.


The tech news of the day is Microsoft offers $31-share, $44.6 billion, for Yahoo:

In a dramatic move that could significantly reshape the Internet industry, Microsoft Corp. on Friday offered to buy Yahoo Inc. for $44.6 billion in an effort to team up on online-advertising juggernaut Google Inc.

Microsoft (MSFT) said its "compelling" offer of $31 a share, in half cash and half stock, represents a 62% premium to Yahoo's (YHOO) closing price Thursday. Yahoo's market value has been pared recently by continued poor performance, stirring speculation that such an acquisition offer was imminent

Microsoft Panics

The offer is "compelling" alright, but only for Yahoo. Let's start with the idea that Microsoft might generate annual savings of $1 billion. It will take a long time at that rate to justify paying $44.6 billion in cash and shares.

Microsoft Balance Sheet

Click to enlarge

With a hat tip to Professor Jeffery, here is a table of Search Share Rankings from Nielsen.

Click to enlarge

Microsoft blew all of its cash on hand to pick up less than 18% of the search engine market. Microsoft and Yahoo combined only have a 31.5% share compared to Google's (GOOG) 56.3% share.

The Big Picture

Barry Ritholtz has many questions about Microsoft Takeover Bid for Yahoo!

Why is Ballmer & Co. paying such a big premium? Does this imply the entire Tech market is hugely undervalued -- or is Microsoft (MSFT) desperate to catch up with Google (GOOG)?

Answering his own questions, and which I am in agreement, Barry concludes:

Mister Softee's biggest cash cows -- Windows and Office -- look shakier than they ever have. There are real competitors for PCs (Apple, Linux) and lots of free or nearly free office software (Open Office, Google Apps). I assume Microsoft is projecting out current trends 5 and 10 years; they might truly believe that if they can't compete in the online search/advertising space, they are in trouble.

Here's the ironic part: The 2 most visible losers in the search area may be getting together -- and somehow, that's worth 150 point swing to the Dow futures.

I guess the negativity isn't quite as excessive as some people claim!

Reasons To Own Microsoft Shrink

One of the reasons to own Microsoft was that someday it would do something intelligent with its huge cash hoard. So far it has attempted to prop up its share price with huge special dividends, and now it is willing to part with every penny on its balance sheet to buy Yahoo!

With this offer, Microsoft has somehow decided this is the bottom for tech. I disagree. Furthermore, it is extremely unlikely that anyone else could possibly come up with $44 billion to buy Yahoo in this market climate. So what's the rush?

Heading into a consumer led recession was Yahoo! and even Google will struggle to grow their ad revenue.

Everyone, including Microsoft is underestimating how deep this recession is going to get and what that might do to earnings. Had Microsoft waited, it might have been able to get Yahoo! for 1/3 or even 1/4th the current offer.

Yahoo! Finance shows the P/E of Yahoo to be 55. That is hugely overpaying even in a good environment, and is preposterous heading into a recession that figures to be both long and nasty.

Microsoft panicked and it wasted its cash on hand in doing so. I see no other reasonable way of looking at it. This deal is not good news for Microsoft shareholders. Longer term, it's not good news for tech at all. When the real time comes to buy, companies like Microsoft will have already blown their cash.


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