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.