Before getting into the a short review of the last months, we should introduce a concept that would be interesting to approach in this article, that is the merger arbitrage. Though a simple and straight forward strategy, it may turn out to be very risky. What do you do if you want to get involved into a merger arbitrage? Well, you first hear about the merge. You know that, if the merge occurs, the stock that is bought will be traded below the purchase price until the purchase moment. The best thing to do (while assuming risk) is to buy the stock that will be purchased, wait for the purchase to occur and then benefit from the difference in trading price. The risk? Well, if the purchase doesn’t occur, the price of the acquired stock will most probably fall. Let us keep all this in mind while taking a look at Yahoo-Microsoft review.
The purchase story started in February 2008, when Microsoft launched an unsolicited bid offer of $44.6 billion, that is $31 a share representing a 62 percent premium over Yahoo’s closing stock price of $19.18 one day before the offer was launched. Some analysts agreed that it was a good offer for Yahoo. And it’s quite obvious if we look at the picture below that people believed in a merge. Because they bought Yahoo. A lot of Yahoo. And the price went a lot up.
Shortly after the bid, Yahoo rejected the offer saying it was “substantially undervaluing” the company. Yet, Yahoo’s stock price didn’t suffer much. This means that people were still confident. They didn’t sell. For the next two months negotiations continued, yet without any result. Microsoft offered to raise its $44.6 billion bid by about $5 billion, to $33 a share, while Yahoo demanded at least $37.
The story seemed to have ended on May 3, when Microsoft walked away from its bid for Yahoo: “After careful consideration, we believe the economics demanded by Yahoo do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal,'' Chief Executive Officer Steve Ballmer said. Yahoo President Susan Decker agreed price had always been the biggest barrier to reaching a deal.
Yet, on May 18 Microsoft came up with a new proposal, an alternative that would involve a transaction with Yahoo but not an acquisition of all of Yahoo, but only of the search engine. Recently, financial analysts from Merrill Lynch estimated a 45 percent chance Microsoft will buy Yahoo for as much as $34 a share. The probability is explained by the same stock evolution: no great fall. People are still confident that the merge will occur. Maybe with Microsoft, maybe with someone else, but Yahoo came to a point where investors are putting pressure for a merge.
As for Microsoft, the purchase would have tripled its share of the U.S. Web search market. Shortly after Microsoft said that they were no longer interested in acquiring Yahoo, Ballmer recognized the reality: “Although the acquisition of Yahoo would have accelerated our ability to deliver on our strategy in advertising and online services, I remain confident that we can achieve our goals without Yahoo''. He might be remaining confident, but what does the market say? In the last months, while Yahoo and Microsoft were convincing themselves that they can do good one without the other, Google actually proved that it goes very well by itself.
I think it won’t pass much time until we find out if Yahoo did a good or a bad move. It was the good time for both Yahoo and Microsoft to come up with a real competitor for Google, but it turned out to be a question of valuing. Microsoft was accused of undervaluing, while Yahoo was said to be overvaluing itself. Yet, the question is not the current value, but the trend. Is Yahoo on a (real) positive trend? Will Microsoft really try to manage by itself, or search other resources, new bid offers, new purchases?
In February 2008 newspapers wrote about a ‘declaration of war to Google’, coming from Yahoo and Microsoft. Yet, we haven't seen much of it lately. Is it that the war is (already) ended?