Financial Markets

Yahoo & Microsoft vs Google: is the war ended?

When some win, some others lose. In 2007 one of the winners was Google, while among losers we could ‘award’ Yahoo and Microsoft. On one hand Yahoo’s stock declined 32 percent as Google won more Web users and advertisers switched to social-networking sites such as Facebook Inc. and News Corp.'s MySpace. On the other hand Microsoft’s Internet business lost $228 million in the last quarter of 2007. This is mainly the reasoning that led the market assist to the already 3-month discussions considering a potential Yahoo-Microsoft merge.

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?

UBS-betrayed by its own people

There is a good joke that circulates among financiers: 1 year ago US banks sold rubbish debt to European banks. Is it good? I guess not…especially if you ask a guy from UBS. UBS’ file? Quite easy to review at this moment:

Past dreams: to make UBS the No. 1 investment bank in the world, while being No. 1 bank in wealth management

Current facts: in the nine months ended on March 31, UBS lost $24.3 billion (more than any other bank caught in the worldwide credit crunch), UBS shares down 56 percent in 12 months ended on May 16, 5500 people to be slashed, New York based municipal bond department closed, clients pulled a net 12.8 billion francs from UBS's asset and wealth management units in the quarter ended on March 31…

UBS is definitely passing through a bad moment. I would call it a coma. And when you’re in coma, there are only 2 prospects ahead: you either die, either wake up. As like most of the systems, it’s quite a difficult mission to accomplish by yourself, that is regeneration is not the rule, but the exception. Its clients are the only ones who can still do something for UBS, but UBS doesn’t seem to get their help with 12.8 billion francs pulled.

What surprises me most is the identity of these betraying clients: they are 90% Swiss guys pulling from l’Union des Banques Suisses... “I know that my money are not in danger, but I’m sick of these people who are playing with our money” says Sophie, a 30 years old woman from Geneva. More than disappointment, it’s fear: “ When I wanted to close my account, an employee proposed me to transform my money into a term deposit, so they wanted to lock my money for another two years. I became suspicious and I closed my account” says Claude, 38 years old. And the stories can continue. UBS lost money, and now it is losing clients. It lost complete life, and now it is losing medicine. How long is it going to last? Or, better said, is it going to last?

Reputation is easier lost than restored.

Gold in retro-perspective

In turbulent contemporary times, investors tend to be more and more conscious of the fact that times of inspiration, speculation, feeling in the financial markets have passed. And if not passed, at least changed. You buy today, you sell tomorrow. Or you buy now, and sell later. It’s crazy! You can barely think about long-term investments. I mean building a portfolio as a wedding gift for your children. Unless you are a genius…but who believes in geniuses of financial markets? Oh, yes. There is a group of so-called geniuses of the 2001.

I’m sure that the first thing you must be thinking of is the real estate. And yet, compared to the real estate, gold has been going way above imagination! I think the most appropriate approach is history-connected. I mean...ok, these guys might as well have been geniuses, but even if so, there must have been a “flashing star” , a divine source of inspiration, something.

In every pre-recession period, there is this longtime myth of gold saying that “gold did not fall during the Great Depression”. True indeed, just that the 1930s experience is economically irrelevant for our times. What happened next? Well, gold fell in the 1974/75 recession. Began to rise by almost 50%, and again fell in the 1974/75 recession. Again fell in 2000 prior to the 2001 recession. It was high time people knew how it worked! And there arrived the geniuses investors! In the 2001s they bet on gold. And they did right. After 20 years of undervaluation, gold got back on its track. And in the last 7 years, we have assisted to remarkable changes, exhibiting any expectations. $268 in February 2001 to $960 in February 2008.

What should we learn from that now? Well, it’s quite clear: on one hand, in the recession time, price tends to fall. Why? Because people are desperate for cash. They fear. The marginal sellers become more active than the marginal buyers, and, like for every market that responds to supply and demand, the asset holders see their assets going down. On the other hand, in times of high price inflation gold is bought as a store of value, naturally leading to a support for the price of gold.

There’s just one “detail” to clarify. What are we heading to? Analysts see different messages from the Fed, trying to choose the most relevant between recession and accelerating price inflation. Looking back, it makes sense now. I think it won’t be the case about talking of a new generation of geniuses. We just have to stay posted, there’s one way or the other.

For the better times ahead!

Live and die on Wall Street

When you think about history, our history to be written, don’t you try to find central words that could develop into central meaning topics? I do. Lately, I am becoming more and more confident that I might have some right answers. For instance, I would bet on the Wall Street!

We all have ‘trendy’ lives, we are all into a 'trendy movement'. It’s not just fashion that makes trends, some good mathematicians could easily prove that everything is on a trend: manner of living, consumption, levels of saving and so on. Nowadays, it becomes more and more in fashion to be an investor. Hedger, speculator, arbitrageur? You can be the three of them at the same time without even being conscious of that. I watch people reading newspapers while going to work in the morning. Subprime crisis? They all know about that. Maybe most of them don’t understand what it is all about, but you could actually discuss Wall Street instead of weather without even noticing the difference.

Moreover, I have recently discovered another way of considering time, other than the well known Greenwich Meridian Time. It’s the stock exchange time. It starts also at 0 GMT with the Tokyo Stock Exchange. After that, you just have to pay attention to an ordinary ticking clock and take position at 8 GMT with the London Stock Exchange or the Paris Stock Exchange and go on like that for the New York Stock Exchange followed by the Chicago Stock Exchange , to count a 24 hours cumulative time. The 24 hours tour? I think that’s a sign. A sign that the stock exchange could actually fulfill a man’s day. If you don’t take it for a job, you take it for a hobby. If you start doing it by curiosity or necessity, you’ll finish up getting passionate of it. And if you are still not directly implied, indirectly we are all there. Because that’s where all great cash is. If you do some simple arithmetic, you could find it surprisingly easy to buy some good percent of the world’s total assets with one day’s cash flows at the stock exchange.

So I say…why not think big? It’s a natural law that where there’s much to gain, there’s much to lose. But aren’t we all curious to find out how much risk we are able to take? As for me…I would die to live on the Wall Street!