The buyer in any public-public merger generally sees a stock price hit – they’re offering a premium over what the market thinks the seller is worth, and the market takes that out of the buyer’s hide. But Microsoft lost nearly $40 billion in market cap in the eight trading days since they made their offer. That’s quite a penalty – and one Microsoft likely didn’t plan on dealing with.
Microsoft closed at $32.60 per share on January 31, hours before the Yahoo bid was placed. On Friday, the stock closed at $28.56, a decline of about 13% and the lowest it has been since 2006. That erased just under $38 billion in Microsoft shareholder value.
The Microsoft offer is half cash, half stock. As Microsoft’s share price declines so does the offer price for Yahoo. It may be a coincidence that the amount of market cap that has vanished is almost exactly the same as the bid amount (the two numbers converge as stockholders flee Microsoft). But coincidence or not, Microsoft has shrunk by a Yahoo in the last eight days.
Yahoo is now putting up a fight (to the delight of Silicon Valley in general, Google specifically and bloggers everywhere), and Microsoft needs to decide if they’ll bid higher or stay firm. Microsoft will get this deal if they have the stomach for it. But with the market charging Microsoft nearly $1 in market cap for every $1 they bid, the Yahoo deal is looking to be a lot more expensive than it should be. Cue a sad song from the world’s smallest violin, please. And pass the popcorn.