Microsoft Offers to Buy Yahoo – Your Guide

"This is the big one Goose!"

Today, [tag]Microsoft[/tag] made an offer to buy [tag]Yahoo[/tag]. This would be a very big purchase of a very big company by a very big company. In other words, it is a big deal. That means you can expect plenty of media coverage. Today you’ll see the basic news story reporting the terms. You’ll also get some snap analysis. Usually I would consider such analysis to be sloppy because it has come too quickly to have actually analyzed the information, but in this case, Microsoft has made an overture to Yahoo before, and the speculation that it was coming again has been high, so this particular event is one that has been contemplated before today by many analysts. Over the coming days (and especially this weekend when the markets are closed making news hard to come by) you’ll see more in-depth analysis, reactions, and so on. So, before you dive in here is your guide to the already under way media frenzy.

What Is Going On – The Basics?

Microsoft made public an offer to purchase Yahoo. You’ll hear plenty of talk around the water cooler about how "Microsoft is buying Yahoo." Not yet. Think of it like buying a house. Microsoft put in an offer. Yahoo can accept, reject or counter the offer. In most buyouts, there would be the possibility that another party could come along and make a better offer. At this dollar amount, however, the number of possible buyers is small, and no one is expecting a different offer.

The Details and the Jargon – Understanding the Headlines

Software giant Microsoft announced an unsolicited offer of $44.6 billion for Internet icon Yahoo. The offering price represents a 62 percent premium to Yahoo’s closing stock price on Thursday.

First, the whole "software giant" and "Internet icon" or whatever other phrases you run across are for both hyperbole, and force of habit. When a company that is not a household name is involved in news like this a phrase like "Second Leading Widgets Manufacturer" actually helps people understand who we are talking about. That is obviously not necessary here. Second, business headlines never get to read "Thousands Stranded Without Food!" so any opportunity to pump up the volume is seized upon.

"Unsolicited Offer" isn’t a great phrase in this kind of situation. A "Solicited Offer" is technically one that is asked for. Again, if you think about selling your house, when you put a sign out front you are asking people to buy your house, or soliciting offers. Although this is common place in real estate, it is uncommon in business. Usually only a struggling company actually solicits offers. In this case, what "Unsolicited Offer" means is that Microsoft announced their offer to world instead of taking privately to the board of directors at Yahoo. If the board of directors voted to accept the offer, then the headline would have read something like "Yahoo agrees to be acquired by Microsoft for $44.6 billion." Note that you will probably never read "Microsoft made a solicited offer for Yahoo…"

$44.6 Billion – What Microsoft actually offered is $31 per share. Take the number of shares times $31 and you come up with about $44.6 billion.

62 percent premium – On Thursday night when the U.S. stock market closed. Yahoo’s final trade (or closing price) took place at $19.28 per share. The "premium" is how much over this price Microsoft is offering, in this case 62%. That sounds impressive. However, another way to look at it is that Microsoft’s offer represents a discount of around 10% to the October 26th closing price of $33.63. Or it is a small premium to Yahoo’s year ago close of $28.35. You can compare the number to anything you want. It could be an X% premium over the 2007 end of year close, for example.

Why pay a premium at all? Theoretically, since Yahoo (YHOO) closed at $19.28 on Thursday night, everyone who owned Yahoo stock thought the company was worth more than $19.28 (otherwise you would have sold your shares if you thought they were selling for more than they were worth.) So, Microsoft can’t just offer the same price. Practically, the way corporate law works these days, it is incredibly difficult, if not impossible, to take over a company without it’s consent. So the premium represents the sweetener to get Yahoo’s board of directors to say yes.

The Coming Media Storm

This story is big enough to cross over from the business pages to the main news. Often that means the quality of the stories will be worse than normal. Why? Because now the stories and articles aren’t just for the people who are reading the business section (or watching MSNBC or Bloomberg) but now they are also for people who don’t know the difference between Dow Jones Industrial average and the Dow Jones–wait you mean there are other Dow Jones? You get the idea.

Most of the stories will center around two things. One is whether or not this is a good deal (for both, for Microsoft only, for Yahoo only?) In other words, is this a good price or not. It will all sound fancy and technical, but end the end it comes down to this: Was 2007 just a bad year for Yahoo stock (but not necessarily for Yahoo the company) and 2008 or even 2009 will see the stock price clear the $31 mark and more? If so, then Microsoft is trying to buy the company for a song while the market has Yahoo’s stock poorly valued (Good for Microsoft, Bad for Yahoo). Or, was 2007 the start of a long and painful slide, or long period of stagnating growth for Yahoo, in which case, Microsoft’s generous 60% premium is a shareholder’s best chance to maximize value (Good for Yahoo, Maybe Good for Microsoft)

The second thing will be [tag]Google[/tag]. Some themes will be "What does this mean for Google?", "Even with this merger can they catch Google?", "Can anyone catch Google?". Those stories can be interesting, but are nothing but speculation now. For my two cents, if this merger went ahead, the entire success or failure would hinge on how exactly Microsoft brings Yahoo into the fold. Keep in mind that millions of people use Yahoo’s site because they like it better than Microsoft’s site and Google’s site. But those same users might like Google’s site over Microsoft’s site. So if Microsoft ends up just folding in Yahoo, you can expect that lots of those users won’t just move over to Microsoft, they’ll move to Google or someone else. If Microsoft loses too many of Yahoo’s users, then this was all a very expensive way to move permanently into the Number 2 spot in the search engine universe (while potentially devaluing what it means to be Number 2). If on the other hand Microsoft can either a) run two completely separate sites with each learning from the other so that they progress faster than Google, or b) combine both sites in such a way that people who did not like Yahoo or Microsoft do like the combined site then this will be another in a long line of shrewd moves by Microsoft.

What It Means to You

My phone will start ringing a little extra today. Yahoo is not only a household name, it is also one of those stocks that everyone seems to own. So, from the guy who own 8 shares in the e-Trade account he "plays with" to the family with several thousand shares will be calling to see what it means to them. Truth be told, I don’t know yet. Neither does anyone else. We don’t even know if the deal will happen. Until we have an idea of what is going on, here is what you need to know.

If you’ve been looking for an excuse to sell your Yahoo [tag]stock[/tag], you have it. The sudden bump up in price means you will make more than you were going to before. Thank your stars and sell. If you DID want to sell, but now you aren’t sure because maybe it will go even higher, I can’t help you. I don’t have a crystal ball and I can’t predict the future. Neither can anyone else. The more it looks like the deal will go through, the more the price will drift toward the $31. The less it looks like the deal will go through, the more the price could drop back toward $20. Keep in mind, you won’t know before anyone else does. If on Fakeday, the stock is trading for $28 and Yahoo says know, the price of the stock could drop to $20 in seconds. You won’t be able to sell AFTER you hear the news. Besides it is most likely Yahoo would announce such a decision when the markets are closed. The opening price the next day could be $20 or less. Decide what you want and do it. Don’t try to predict the future.

If you want to buy now because you heard about the deal. No, No, No, No! You do not buy on this kind of news. The stock is already trading at $28 it can’t really go higher than $31 until this offer goes away. So your maximum upside is $3. The difference between the current price on any given day and the $31 offering price will represent the value of the risk of the deal not going through. But, if the deal goes sour, the stock could go down $8 or more in a heartbeat. DO NOT, DO NOT take on $8+ in very real risk for $3 in upside.

If you already own Yahoo but aren’t looking to sell. You don’t have to do anything. As you can see usually the company being bought sees it’s stock price go up. After all the acquiring company is paying a higher amount per share. If the deal goes through you’ll automatically get your cash or stock (depending on

how the deal is structured) in your brokerage account. If for some reason you have the paper stock certificates you will get something in the mail. If the deal doesn’t go through, the price of the stock may slip back toward the pre-offer price. Of course, normal market movements will continue before and after the deal concludes one way or the other.

If you already own Microsoft you don’t have to do anything either. The acquiring company’s stock usually goes down over the short term. The reason? Theoretically, since they are paying a "premium," they are paying more than the other company is worth. Plus, they will be giving up cash or stock to acquire the new company. Cash is valued higher than assets. However, you are too late to sell here. The downward blip has already occurred. If over the next days and weeks the conventional wisdom is that this is a bad deal for Microsoft, then the price could go down more. In the mean time, you should consider this to be no different than any other short term price movement. (Of course, if you believe that this acquisition is wrong and will harm the company, you might look for a price rebound to get out of the stock.)

Email me or post your questions in the comments section.

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