San Francisco: Yahoo Inc.’s stock took a beating Monday after Microsoft Corp. withdrew its $47.5 billion takeover bid, but the punishment was not as severe as many analysts anticipated because investors suspect the rivals eventually will renew their mating dance.
Although Microsoft has publicly indicated it will focus on measures besides buying Yahoo in its effort to make its Internet division profitable, several analysts predicted the software maker will revive its offer in the summer or fall if Yahoo can’t snap out of a two-year funk that exposed it to an unwanted takeover in the first place.
“Should the frustration of (Yahoo) shareholders come to a boil, we believe (Microsoft) could re-enter the picture, essentially playing the role of the white knight,” analyst David Hilal of Friedman, Billings, Ramsey & Co. wrote in a Monday research note.
Yahoo shares dropped 15% Monday
With similar opinions reverberating through the stock market, Yahoo shares shed $4.30, or 15%, to close Monday at $24.37. That wiped out nearly half the gain they made after Microsoft made its bid Jan 31. The drop left the Sunnyvale-based company’s market value about $12.5 billion below Microsoft’s last offer.
Yahoo’s stock price was $19.18 before Microsoft made its move. “I was expecting to see a more extreme reaction” to Microsoft’s withdrawn bid, Stanford Group analyst Clayton Moran said. “Microsoft is trying to make it seem like it’s not coming back (with another bid), but this somewhat muted reaction shows the market is not buying it.”
Google poised to benefit
Meanwhile, Google Inc., whose dominance in online search triggered Microsoft’s bid, seems poised to benefit no matter how the talks go from here. Microsoft ultimately offered $33 per share, only to be rebuffed over last weekend. Yahoo co-founders Jerry Yang and David Filo, who still own a combined 9.7% of the company’s stock, flew to Seattle to demand $37 per share, a price Yahoo’s stock has not reached in more than two years.
The insistence on a higher price prompted Microsoft chief executive Steve Ballmer to yank his the offer off the table. “We engaged with them and we wanted to find a way to get something done. But they walked,” Yang said in an interview yesterday. If Microsoft returned with a “real offer and a real proposal,” Yang said, “we would be happy to listen.”
While analysts debated how Yahoo and Microsoft should proceed, most agreed Google will benefit from the aborted takeover attempt. Unnerved by the prospect of its two biggest rivals joining forces, Google reached out to Yahoo to help thwart Microsoft’s bid.
Even if Google does not end up selling ads on Yahoo’s heavily trafficked Web site, it has kept some of the Internet’s biggest services out of Microsoft’s clutches.
“We believe Google is a major winner given the failure of the Yahoo bid,” Stifel Nicolaus analyst George Askew wrote in a Monday note. “Google is well positioned to continue to gain market share, benefit from any Yahoo (advertising) deal, and exploit any ongoing chaos at Yahoo and Microsoft.”
Google shares gained $13.61, or 2.3%, to close at $594.90 Monday. Time Warner Inc. also appears to be in a better negotiating position if it decides to sell its struggling AOL subsidiary, as many analysts anticipate.
Yahoo’s AGM could be volatile
Monday’s backlash was enough to turn up the heat on Yang and the rest of the Yahoo board, which unanimously rebuffed Microsoft. The unrest could lead to a rebellion at Yahoo’s still-unscheduled annual meeting, where shareholders could try to oust the board. Yahoo must hold the meeting by mid-July.
The blow to Yahoo’s stock also was cushioned by expectations that the company will soon announce it’s turning over some of its advertising space to Internet search leader Google Inc., whose technology yields higher profits from commercial links.
But many analysts think working with Google could be a mixed bag for Yahoo. While Google could boost Yahoo revenue by anywhere from $850 million to $1.6 billion annually, it might also hurt Yahoo by undercutting the appeal of its own ad platform.
An alliance between Google and Yahoo would cause regulatory headaches because antitrust officials would to take a hard look at the partnership because the companies combined control more than 80% of the Internet’s search advertising market.
Yahoo may team up with AOL
Yahoo had been mulling a possible combination with AOL’s online operations as a defensive measure against Microsoft. Now, Microsoft may make a run at AOL if it’s interest in buying Yahoo is truly dead. And if Microsoft enters the picture, Google might offer to increase its 5% stake in AOL just to repel Microsoft.
A long list of Internet startups also could be in line for big windfalls if Microsoft and Yahoo step up their efforts to acquire more online weapons to challenge Google. And if Microsoft and Yahoo go shopping, Google has plenty of cash to get into bidding wars for potential takeover targets like Digg Inc., LinkedIn Corp. and Facebook Inc.
“Freed of one another, Yahoo and Microsoft are buyout prospectors: we would expect a rush-to-deal environment,” BMO Capital Markets analyst Leland Westerfield.
Most analysts believe Microsoft has to make some kind of bold move after its online division lost $745 million through the first nine months of the company’s fiscal year.
“Any notion of simply returning to the original, pre-Yahoo strategy is likely to be insufficiently defined and credible,” Bernstein Research analyst Charles Di Bona wrote in a Monday note.
In a mild surprise, Microsoft shares fell 16 cents to $29.08 Monday. Most analysts thought the stock would climb because investors had driven down the shares during the last three months on worries that a Yahoo takeover would turn into an expensive mess.
Yang’s future may well depend on how the company’s stock fares
If he wants to hold on to the CEO job he took on 11 months ago, Yang probably will have to show his turnaround strategy is compelling enough to propel Yahoo’s stock beyond $33 per share within the next year.
Yang has promised a more sophisticated and far-flung ad network will accelerate Yahoo’s net revenue growth by at least 25% in 2009 and 2010, up from the recent pace of 12% increase.
“The company is doing better than three months ago,” Yang said Monday. “I think in many ways this has been good for us. We still have a lot of work to do to demonstrate that we can be successful, and I am focused on that.”
If Yahoo stumbles, that could entice Microsoft to return with another takeover bid that would be more difficult to turn down. Venture capitalist Todd Dagres of Spark Capital likened this approach to that of a crocodile. “Rather than try to eat its prey while it’s warm and tough, (Microsoft is) dragging it down to the bottom of the river, sticking it under a rock and eating it later when it’s cold and soft,” he said.