Is a cash-rich dowry the key to winning Yahoo!'s
Yesterday's New York Post cites unnamed sources claiming that Microsoft
The allure of ponying up 100% cash for Yahoo! shareholders is that it provides a tangible exit strategy. Instead of fretting over Microsoft's shares deteriorating -- the way they have since the original deal was offered -- Yahoo! investors would have the stability of knowing that only Microsoft shareholders will feel the wrath of the market's perception that the software giant is overpaying for Yahoo!
The deal, originally valued at $31 in cash for half of the shares and $31 in stock (based on Microsoft's share value at the time) for the other half, was worth a blended average of just $28.61 a share, based on yesterday's close.
What happens next? You should ask young children to leave the room before finding out.
From Microsoft to Microshark
Let's say that Microsoft's all-cash offer is at $31, and not closer to today's actual value. Microsoft's stock would take another hit, but that's nothing compared to what Mr. Softy's balance sheet would look like by the time the tab was paid.
At $31 a share, Microsoft would need to cover a bill for $44.6 billion. It holds $23.4 billion in cash and short-term investments, and Yahoo! brings another $2 billion in greenery to the table.
That would leave Microsoft $19.2 billion short. At this point in the Monopoly game, the player landing on Boardwalk with a hotel begins flipping over mortgaged properties to get out of the jam.
Microsoft investors have been spoiled by owning a cash-rich company, but Microsoft's cash levels have deteriorated sharply in recent years. Share buybacks, dividend distributions, and acquisitions have eaten away at the First Bank of Redmond.
How would Microsoft look with nearly $20 billion in debt?
Not pretty. Last year found Yahoo! and Microsoft collecting more than $1.7 billion in interest income. Even a credit-worthy company like Microsoft would be paying at least $1.5 billion in interest on its new debt load. That's a pre-tax income reversal of more than $3 billion -- a lot of ground to cover in justifying the lofty price tag.
Yahoo! delivered just $695 million in operating income last year. Back out depreciation, amortization, and stock-based compensation, and you get a healthier $1.9 billion. If you're a free cash flow buff instead, you may go with the $1.3 billion the company generated last year.
Either way, even if Microsoft's aim is true in delivering another billion in realized synergies post-purchase, the deal would still be highly dilutive.
Lowering the bar is only good in limbo
Perhaps the bitterest twist is that we may not have seen Yahoo! at its worst. The company is already guiding investors to expect a dip in operating profits this year. Now that even Google
This isn't Baidu.com
Some might say Microsoft's timing was perfect. It jumped in just after Yahoo!'s stock dipped into the teens in late January, after another lackluster report. Still, I think the guidance suggests that Yahoo! that could have been had for even less, if Microsoft had waited.
Unfortunately for Microsoft, it's impatient. It would rather overpay now than risk Google getting stronger.
Microsoft knows that it's the only qualified bidder in an empty auction house. All the chatter of combining Yahoo! with News Corp.'s
Sure, Microsoft is a cash-spewing machine, and it can whittle down that debt sooner rather than later. It has other investments it can hock; perhaps it'll take Yahoo!'s Asian investments to the pawn shop.
That's not the point. Just because Microsoft can pay a lofty premium for Yahoo! doesn't mean that it should.
The only company that can turn Yahoo! around -- Google -- is the only company that will never be allowed to touch it.
That alone should be enough security for Yahoo! as it takes on Google.
Note to Microsoft: Stop pummeling your investors. They've paid plenty for your impatience already. Offer a princely sum for a run at Yahoo!'s billable ad space over the next few years, if only to build up your own advertiser Rolodex. Offer to take Yahoo!'s practically illiquid Asian investments off its hands. But don't keep chasing the whole company.
Deep down inside, you can't want all of Yahoo!. Just offer to pay less for what you believe to be the missing pieces. For God's sake, do the math that the market has already been doing for you, and ditch the dowry.
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