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Buyout Plays in a Bloodied Market

Anders Bylund
October 24, 2008

Baron Nathan Mayer de Rothschild told us all to "Buy when there's blood in the streets!" That maxim makes tons of sense today for individual investors -- but it applies just as well to mergers and acquisitions.

I thought that proverb was about investing!
Sure, corporations can follow the same rules as the rest of us Plumber Joes and Preschool Teacher Jills. The dictionary defines a corporation as "a body formed and authorized by law to act as a single person," so it's not completely wrong to ascribe human needs and emotions to businesses.

So when the market takes a 35% haircut in one year, and 23% in one tiny month, you're drooling over all that delicious sanguine sauce flowing between Broadway and South Street. Strong companies with deep pockets are doing the same, because growth by acquisition is still growth, and they see some of the best buyout opportunities in decades.

Let's have a look at some of the Wall Street hunters and their prey.

The usual suspects
Microsoft (Nasdaq: MSFT  ) never really gave up on its pursuit of Yahoo! (Nasdaq: YHOO  ) . The online portal could boast an enterprise value of more than $35 billion a year ago, but that juicy corporate price tag has dwindled to just around $14 billion today. Mr. Softy was once willing to pay as much as $47.5 billion for a serious foothold in the e-commerce district. With Yahoo!'s future looking dimmer every day, maybe Steve Ballmer is waiting for the price to drop even further. But don't be surprised if he jumps out with a much smaller bid sometime soon, if only to spite Google (Nasdaq: GOOG  ) while he can. Steve will look generous, even with a lowball offer.

Virtualization expert VMware (NYSE: VMW  ) has also seen its market cap evaporate; its stock price has declined more than 80% in the past year. At roughly $8 billion, its current market cap seems like a very affordable morsel for one of the software giants. But Microsoft probably wouldn't get past antitrust concerns, any more than Google could buy Yahoo! outright. Many of the other true titans of the industry face the same obs