History is a tool for redemption.
There have been plenty of companies left stranded on bended knee these days. Groupon and PotashCorp (NYSE: POT) have rebuffed buyout proposals in recent weeks that left many investors scratching their heads.
How could the social coupon and fertilizer giants leave billions on the table?
It's getting easier to do these days. Some companies that shake their heads at juicy buyout premiums are living to have the last laughs as richer independents.
I wasn't the only one who thought that Facebook was nuts for turning down offers in the billions a couple of years ago. Now the still-privately-held company is being valued in the tens of billions.
However, to truly get a feel for the power of rejection, I have to go back a couple of years. Let's take a look back at two runaway brides of 2008.
You may now miss the bride
Microsoft (Nasdaq: MSFT) offered to buy Yahoo! (Nasdaq: YHOO) at $31 a pop during this same week three years ago. A few months later, Electronic Arts (Nasdaq: ERTS) failed in its bid to expand its video game portfolio when shareholders of video game publisher Take-Two Interactive (Nasdaq: TTWO) voted down several monthly advances.
The thinking at the time was that Yahoo! and Take-Two were nuts to turn down such generous offers.
Several observers came to the conclusion that Microsoft "dodged a bullet," as I detailed a year later.
- "Others suggested that Microsoft had dodged a bullet by agreeing to a partnership as opposed to acquiring Yahoo outright in 2008." -- eWeek.com
- "Meanwhile, having dodged a bullet, Microsoft used some of that unspent dough to perfect its new search engine, Bing." -- Forbes
- "Microsoft knew it needed Yahoo! a year before it made its public offer in February of 2008, and while it may have actually dodged a bullet by not acquiring the whole company, Steve Ballmer and company have never relented on their quest to nail down a search deal with Yahoo!" -- LiveSide.net
Firing blanks
The empty-handed prospective buyers seemed to be vindicated at first. Yahoo! shares tanked when it became obvious that no other buyout bids were coming. Take-Two stumbled when it was exposed as a one-trick pony after strong Grand Theft Auto-fueled results in 2008 deteriorated a year later.
However, both Yahoo! and Take-Two have come a long way since then. A shakeup at the top of Yahoo! has delivered healthy bottom-line growth. The success of Take-Two's BioShock and Red Dead Redemption added more stallions to its stable.
Perhaps more importantly, things have only gotten harder for Microsoft and EA.
Let's go over where each of the four stocks closed before the deals were announced. Then let's revisit where they closed yesterday.
|
Then |
Now |
Price Change | ||
|---|---|---|---|---|
| Yahoo! | Jan. 31, 2008 | 19.18 | 16.38 | (15%) |
| Microsoft | Jan. 31, 2008 | 32.60 | 27.99 | (14%) |
| Take-Two | Feb. 22, 2008 | 17.36 | 13.12 | (24%) |
| EA | Feb. 22, 2008 | 49.74 | 15.62 | (69%) |
Source: Yahoo! Finance.
So did Microsoft and EA really dodge bullets three years ago? Probably not.
Subtraction through a lack of addition
Savvy readers should have a beef with me right now. Shouldn't I be using the prices that Microsoft and Take-Two were willing to pay for their acquisitions as the starting lines for Yahoo! and Take-Two?
Probably. Microsoft offered to cash out Yahooligan investors at $31 a stub. EA's final tender would have taken out Take-Two shareholders at $25.74 a share. If we go by those ransoms, Yahoo! closed 47% lower yesterday. Take-Two investors would be down by an even sharper 49%. Under that scenario, Microsoft dodged a bullet, but EA clearly still missed out.
However, I would argue that it's grimmer for Microsoft and EA than just that. The market has largely rallied over the past two years, yet those stocks have been left behind.
How different would Microsoft's battle against Google (Nasdaq: GOOG) have been had it snagged Yahoo! in 2008? Despite the success of Bing over the past year, Yahoo! and Microsoft have combined to lose gobs of market share to Google over the past three years. Microsoft's online business continues to post widening deficits. It would be very profitable right now had it acquired Yahoo!, with enviable stakes in some of Asia's hottest dot-coms.
EA would also be in better shape with Take-Two. It would be able to exploit Take-Two's growing catalog of sleeper hits at a time when many of its key franchises are meandering. Rival Activision Blizzard (Nasdaq: ATVI) wouldn't be the same market-topping company had it not succeeded in uniting console specialist Activision with World of Warcraft champ Blizzard. EA never got its Blizzard. Instead, it got its blizzard.
So be careful in judging the decisions of Groupon and PotashCorp to pass on seemingly generous offers. Give it a few years before we declare Google and BHP bullet dodgers.
What mergers that failed to materialize do you think cost the failed acquirer the most? Share your thoughts in the comment box below.
