Microsoft And Yahoo's $40 Billion Game Of Media Chicken

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Lots of reports today on the Microsoft-Yahoo negotiation, which is now in its third month of drama and appears to be being negotiated primarily through the media. The WSJ in particular is serving as the court of popular appeal via very controlled leaks from both sides.

Yahoo’s key message is that they want a deal to happen but at a higher bid than the 62% premium Microsoft originally offered. Microsoft’s key message is that the economy has gone south since their original bid, and if they make a new offer it’s going to be lower, not higher. Importantly, they are also threatening to simply walk away from the deal.

Other interesting rumors:

  • Various sources say Yahoo continues talks with News Corp., AOL and AT&T. No one seems to think these are anything more than smokescreens
  • Microsoft has gone radio silent with their proposed Yahoo board members – if Microsoft intends to go to a proxy fight, they’ll need to notify them before any announcement
  • Yahoo will announce Q1 earnings around April 15, the word around the valley is they’ll be surprisingly weak. They need to set the date for their shareholder meeting very soon.

Microsoft is probably hoping that their threats to walk will hit Yahoo’s share price and force them to take the deal. But those threats haven’t been enough to jitter the markets.

So Microsoft either needs to increase their offer by a dollar or two per share (which is what Yahoo shareholders are reportedly signaling to them to get their support), or cancel their offer.

If the offer gets pulled and Yahoo’s Q1 is as weak as people think it might be, their share price could fall back to $19. At that point, the other suitors, as well as private equity funds, get interested again and may make a move.

Yahoo may be able to kill the Microsoft deal, but it doesn’t look like staying an independent entity is going to be an option. Microsoft is the best outcome for everyone, in my opinion. They should take the offer, before their earnings announcement puts them in an even worse negotiating position.

My prediction: this deal gets done at a $1 – $2 per share bid increase, giving Yahoo a symbolic win, with an announcement in the next twelve days.

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