I've got one piece of advice for you, Microsoft (NASDAQ:MSFT): Run!
Don't you dare come back to Yahoo! (NASDAQ:YHOO), holding the boombox over your head all Cusack-esque. Blasting Peter Gabriel won't win you Yahoo!'s greedy heart. It's just not worth it, even if you succeed.
You've overpaid for aQuantive and your wee stake in Facebook. Don't make an even bigger mistake by paying more than you have to for Yahoo!. Mr. Market is telling you that. Your market cap has been privy to a $42 billion haircut since you made the offer. How much deeper are you willing to slice your existing shareholders, just to chase down a company that would bring a ton of page views to the table, but remains somehow unaware of its actual market worth?
That scissor snip even means that the $31 offer being bandied about is already obsolete. The cash portion is locked at $31, but the share exchange portion is now valued at a mere $26.82 apiece. In sum, that $31 deal now has a market price of $28.91.
Funny how the market wants to know whether you'll miraculously bid against yourself, whipping up an offer of $35 or $40, when you're no longer even good for the initial $31 handshake.
Don't scratch your head. Don't plead your case. Just run away.
Let Yahoo! play Wile E. Coyote
Yesterday's market reaction left me dumbfounded. Your stock fell, with investors no doubt fearing that you would drum up the courage to up the ante back to $31 or higher. Yahoo!'s shares rose, with Yahooligans assuming that a better deal is on the way.
If I'm right, history will point to yesterday's trading in Yahoo! shares as the equivalent of those moments in the Roadrunner cartoons where Wile E. Coyote doesn't realize that he just walked off a cliff -- until he looks down, and gravity takes hold.
I'm not sure whether it will be a falling anvil, a painted rock, or simple gravity that whacks Yahoo! shareholders back into reality, but it's probably going to leave a mark.
I hope I'm wrong
I don't want to be right about this. I think CEO Jerry Yang's heart is in the right place. I believe in the hype that bills Yahoo!'s Sue Decker as one of cyberspace's most promising executives. In an ideal world, the market could forget that the past week and change ever happened. Yahoo!'s stock would be back in the high teens, with dreams of gradually clawing its way higher. Shareholders wouldn't be happy about their paper losses, but they would be somewhat patient.
Unfortunately, investors won't easily forget that Microsoft offered nearly $45 billion for what the market felt was a $26 billion company. Yahoo! can't go back. With Microsoft unlikely to budge beyond its initial offer -- which is now less than Yahoo!'s current price -- Yahoo!'s stock can't move forward.
"After careful evaluation, the Board believes that Microsoft's proposal substantially undervalues Yahoo! including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments," the official Yahoo! response reads.
Implying that the offer "substantially undervalues" Yahoo! is a thinly veiled invitation for a higher offer, so that the company can go out on its own terms. This kind of tactic would work if Oracle (NASDAQ:ORCL) were doing the bidding, but Larry Ellison's nowhere near this one. And Yahoo! isn't as hot as it thinks.
Is Yahoo! even aware of how poorly it's faring in some of the metrics it held out as valuation standards? Future growth prospects, free cash flow and earnings potential? It can't be serious. Earnings potential? Net income dipped last year, and Wall Street expects it to dip slightly again in the year ahead. Free cash flow grew all of 6% last year, while revenue grew by 8%. Wall Street's looking for an 11% revenue advance this time around, but how much of that will be organic? Last year's shopping spree padded Yahoo!'s results with the acquisitions of Right Media, BlueLithium, and Zimbra.
Would you pay 67 times forward profitability for that kind of laggard? That's what Microsoft offered two weekends ago, offering to substantially dilute its existing shareowners for the thrill of closing in on Google (NASDAQ:GOOG).
What were you thinking, Microsoft? And now that the market is giving you the perfect opportunity to rescind your offer and recover tens of millions in squandered market cap, why stick to your guns when Yahoo! is firing blanks?
The last word until the next word
"We are offering shareholders superior value and the opportunity to participate in the upside of the combined company," countered Microsoft in its response.
Oh, great. This is like the lamest Wrestlemania event ever. In one corner, we have Superior Value. In the other corner, hailing from parts unknown, we have Significantly Undervalued.
The rub here is that Microsoft's clearest path to acquiring Yahoo! on its own terms would be to take back its offer. If the market felt that it was serious in rescinding the deal, Yahoo!'s stock would sink back down, forcing shareholder upheaval.
Every company isn't for sale, but now that Yahoo! investors have tasted the high $20s, it will be hard for them to settle for what the market feels a non-acquired Yahoo! is really worth.
So walk away, Microsoft. Lace up those shoes and go. Let Yahoo! become the next Circuit City (NYSE:CC). The consumer-electronics chain turned down buyout offers at $8 in 2003 and $17 in 2005, only to trade considerably lower today.
You've still got the greenbacks to pick up a few consolation prizes, like Ask.com parent IAC (NASDAQ:IACI) after it splits into five subsidiaries. Or you could dabble overseas by snapping upBaidu.com (NASDAQ:BIDU) to rule paid search in China, or MercadoLibre to control online marketplaces in South America.
Let Yahoo! executives deal with the wrath of angry investors. If the pieces you covet remain intact after dissidents take a battering ram to the boardroom, you can always come in with an offer that your shareholders -- not Yahoo!'s shareholders -- can live with.
For Round Two:
