Yahoo's Tough Week Ahead

At around 4:30 California time today news broke that Microsoft has formally withdrawn its offer to acquire Yahoo (see Ballmer’s email to Microsoft employees here).

Among other things, that ends a three month stock party where the market value of Yahoo jumped from about 26.2 billion to nearly $40 billion based on Microsoft’s offer to acquire Yahoo for $31/share on February 1.. That run up included a 7% gain in Yahoo’s stock price on Friday alone, based on market anticipation of a negotiated deal that would be announced on Monday.

That party began the day after Microsoft made an offer to acquire Yahoo for $31/share on February 1.

Here’s what to expect now that Microsoft has withdrawn their bid:

  • Google is still a wild card, and Yahoo may be sitting with them right now to try and iron out a search outsourcing deal. Of course, Yahoo has lost most of their negotiating leverage now that Microsoft is out of the picture.
  • Yahoo shares don’t trade until Monday; however, Yahoo Japan’s shares trade on the Tokyo Stock Market beginning at around 4:30 pm California time on Sunday. Yahoo Japan, which is 40% owned by Yahoo, saw a similar jump in share price around the Microsoft February 1 announcement. How it does tomorrow may be an indication of what will happen to Yahoo on Monday.
  • Yahoo shares will begin trading Monday morning at 7 am EST in off-hours trading. By the time the markets open at 9:30 EST, the fate of Yahoo’s stock will have largely been determined.
  • Look for a barrage of shareholder lawsuits against Yahoo next week.
  • If Yahoo gets down into the teens in stock price, look for private equity firms to start to take interest in the company.

Unless Yahoo pulls a very large rabbit out of a hat prior to trading on Monday, expect their share price to decline significantly. Yahoo has put in place a number of very expensive anti-takeover provisions and employee retention programs that the markets will factor in now that the Microsoft share price crutch has been removed. Also, their Q1 financial results, while above expectations, were not so materially positive as to offset the hit they are going to take.

In a nutshell, Yahoo’s scorched earth strategy worked. Now they have to live with their victory.

Google Wins

Google was the big winner in a Microsoft/Yahoo acquisition attempt, no matter what the outcome. But among the possible outcomes, a broken Yahoo and a frustrated Microsoft almost certainly result in increased market share for Google.

Don’t Count Microsoft Out Just Yet

There’s a reasonable chance that Yahoo tanks this week – really tanks. It’s not inconceivable that Microsoft could come right back to the table with a lower bid than the one they just pulled off the table. Don’t count Microsoft out yet – they may still get their win.