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Yahoo's rejection is sure to hurt for Microsoft Chief Executive Steve Ballmer, who had previously expressed great enthusiasm for the potential deal.
Microsoft loses bid for Yahoo and must choose between a fully hostile bid, a higher offer, or waiting for Yahoo to fall further on hard times

The Microsoft-Yahoo saga, which played out over the last couple weeks, began with Microsoft making an unsolicited offer for internet giant Yahoo.  The plot thickened with the resignation of Chairman Terry Semel from Yahoo's board, and a Google threat of legal action to block the move.  While many analysts considered the deal a shoe-in, initial analysis of Yahoo's willingness to accept the deal in the first place was apparently off the mark.

Inside sources had warned that CEO Jerry Yang, who held considerable sway over the final decision had been very wary of Yahoo getting digested into the Microsoft empire.  These sources had called such a development "Jerry's worst nightmare."  Perhaps they should have been heeded sooner.

In a move which had been forecast since late last week, Yahoo's board on Monday formally rejected Microsoft's $45B bid.  The rejection made it clear that the board felt that anything less than double its stock price would be too little.  Yahoo would accept an offer of $40 per share or higher, significantly more than Microsoft's offer, which equated to about $31 per share.

The statement from Yahoo's board, attacked Microsoft's offer as cheap, stating, "The board believes that Microsoft's proposal substantially undervalues Yahoo, including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments."

This contrasts Microsoft Chief Executive Steve Ballmer's valuation of the Yahoo, in which he called his company's bid "generous."

The board made it clear that its ears would be open to a higher bid from Microsoft or other investors, stating that Yahoo "is continually evaluating all of its strategic options in the context of the rapidly evolving industry environment."

Yahoo struggles are evidenced by significant layoffs and a 2008 forecast that many in the investment community considered disappointing.  Some see Yahoo's move and simply a gutsy attempt to try to get Microsoft to up its offer.  One thing that may stand in the way of this, though, is lack of competitive interest.  After Google's criticism, it is unlikely that Google would field a bid, and it might not be able to even do so, due to possible violations of antitrust laws stemming from a Yahoo-Google merger.  Fox owner Rupert Murdoch, known for buying up properties, has also stated that he has no interest in Yahoo.

As no one else has showed much interest in struggling Yahoo, Microsoft may feel little need to rush, and may alternatively choose to sit back and wait like a vulture circling a tired beast, ready to strike when Yahoo's circumstances make it more willing to deal.

Another possibility that remains is that Microsoft could make a fully hostile bid and bring its offer directly to Yahoo's shareholders, attempting to outmaneuver the board.  Such a move might work, but would risk seriously damaging its future prospects, if it was rebuffed.

Yahoo rejected a Microsoft bid in 2006 and 2007 in private talks, but this offer was Microsoft's first public bid; and also its first public rejection.  Microsoft refused to comment, so its next move is anyone's guess.  Microsoft, though, had previously made it clear that it considered the move an essential step for both companies, stating, "Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition.  Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers and publishers."

With the prospect of such an alliance evaporating almost as quickly as it was born, the news is surely a disappointment to Microsoft's leadership.

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RE: Yahoo will prevail
By augiem on 2/11/2008 1:59:30 PM , Rating: 3
Unfortunately, this current generation of stock investors are too easily swayed by hype. The market's going to be rocky from here on out I'm afraid. Google is the most overvalued company in history, as yahoo was back in the late 90's. It's time has finally come, as will Google's. Just being an internet company DOES NOT make your company automatically 10x more valuable than a traditional company people. Have we forgotten about revenue!!!!??? But somehow they just can't get that.

RE: Yahoo will prevail
By augiem on 2/11/2008 2:05:30 PM , Rating: 2
and profit... forgot profit. heh.

RE: Yahoo will prevail
By Ringold on 2/11/2008 3:41:51 PM , Rating: 2
I disagree entirely. Google was fairly priced given its growth rate. It's growth rate slowed, the price came down. That's straight forward. Yahoo's performance has been lousy, thus it never did grow as well.

Growth is everything. People want EPS growth, and people want and are willing to pay for accelerating EPS growth.

GOOG has 39 PE mutliple at the moment; YHOO had something around 38 when it was down near it's low. All you're doing though is looking at cash flow instead of looking at PEG, forward PE's, etc.

RE: Yahoo will prevail
By Ringold on 2/11/2008 3:44:23 PM , Rating: 3
And by the way, GOOG's most recently quarter saw 50.6% quarterly revenue growth, YHOO saw 7.6%, both year over year according to Yahoo Finance.

If you can't see the difference and thus the justification of the higher multiple GOOG has enjoyed then I don't know what to tell you. Companies with flat growth aren't worthless, just worth less.

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