Yahoo: Rejecting Microsoft; Entering the Bargaining Stage

With news that Yahoo is set to reject Microsoft’s unsolicited offer for its shares, Yahoo is entering the bargaining stage in the Kubler-Ross five-step model of loss. It starts with denial, of course, then anger, then bargaining, which is where we now are with news that Yahoo is set to reject Microsoft’s unsolicited $31/share takeover offer.

Is Yahoo right to bargain? Sure. Most sum-of-parts analysis of Yahoo — my own included — puts Yahoo’s breakup value somewhere between $35 and $42, depending on how much you want to trust the valuations of Alibaba and Yahoo Japan. That’s materially over Microsoft’s offer, doubly so if you consider that Microsoft has a legitimate strategic interest in owning Yahoo, making this more than a purely valuation-driven exercise.

My guess: This deal still gets done, with Microsoft as the buyer, and final price is closer to $38 than the current $31 offered. Yes, a steep price for a company with meager current momentum, but Microsoft needs Yahoo more than Yahoo needs Yahoo, if you know what I mean.

Mind you, Yahoo’s Jerry Yang and his board likely don’t think they’re bargaining, per se. As Kara Swisher says, the company is desperate to avoid being part of the Microsoft morass, and it is sincere in thinking it is worth more than Microsoft has offered, so this is not a ploy to gin up a higher offer.

The trouble is, what Yahoo management (or Jerry Yang) wants is only one factor in all of this. Yahoo’s long-suffering shareholders are almost certain to get a look-in, what with Microsoft already saying it will do what it must to make sure its offer gets to Yahoo shareholders. Pretending that a Google deal, or promises about sunnier futures ahead, or even getting a backbone against Microsoft, changes anything with respect to the value-destroying recent legacy at Yahoo is naive at best. A little over 70% of Yahoo’s share float is held by institutional investors, a good chunk of which is hedge funds who positioned for a private equity buyout, and soft-hearted, patient, wouldn’t-it-be-nice sorts they are not.

Finally, and to reiterate a point here I have made here a number of times, I still think a consummated Microsoft deal for Yahoo is better for Google than for Microsoft, but that’s largely irrelevant at present.

Related posts:

  1. Microsoft/Yahoo: The Shorter Version
  2. Microsoft/Yahoo: Google to Weigh in Hard Against
  3. Yahoo/Microsoft: Synergies, Google, Goldman’s Timing, etc.
  4. Microsoft/Yahoo: Killing the Deal, 101
  5. Microsoft/Yahoo: Data on Properties vs Search Traffic

Comments

  1. J. Boyd says:

    Earnings and topline growth have really stalled at Yahoo and its relatively clear that their new initiavtes are not resulting in new traction in search against Google. Not sure how you get to a valuation that high. Plus MSFT has really taken a hit in its first big acquisition attempt, not sure how much higher it can go given how much water its taking on and if they are smart they do an Ellison move and force their hand.

  2. Ajay says:

    Some quotes from Kara’s post pissed me off but they make you register to comment over there so I’m responding here. The quote from a Yahoo employee about how the execs are plodders, not visionaries, is just hilarious. Admittedly, the Yahoo execs are renowned to be mediocrities who are paralyzed by analysis and indecision but unless they’re actively killing ideas from the employees, that’s no excuse. The employees want visionary goals? Please! How about if the employees actually think about their business and come up with proposals for the execs? It just goes to show that the whole company, from top to bottom, from management to techs, has no idea what they’re doing.
    A commenter says that they were mis-directed by Terry. Hardly, Terry was the only good thing going for Yahoo and that’s saying something. After the dot-com bust, Terry took a known if hammered brand, slapped an ad sales team behind it, and actually brought in some revenue. He’s not a tech guy, should he be blamed for not blazing a technology path from then on? What were the tech guys doing while Terry was bringing in revenue and letting them survive? Yahoo had no reason to survive the dot-com bust, Terry saved what should have been another dot-com casualty. Yahoo should have died off then, it’s only a matter of time before they die off for good now, whether because of their own incompetence or in the bowels of Microsoft.

  3. The magnet of MSFT’s offer will begin to pull shareholders in their direction, if not already.