Yahoo! & Microsoft Termination To Unleash The Hounds (YHOO, MSFT, GOOG, TWX, IACI)

It’s official.  At 7:56 PM Saturday night, Steve Ballmer of Microsoft (NASDAQ: MSFT) officially threw in the towel in its bid to acquire Yahoo! Inc. (NASDAQ: YHOO).  Now that the details are out, the differences were just too wide.  Microsoft took its offer up to $33.00.  Yang was holding out for $37.00.

Unless every bit of media and every bit of research was wrong, Yahoo! had no real second bid that would have generated even a "low-$30’s" share price.  In fact, everything we saw in the "new age of liquidity pressures and softer economics" might dictate the shear size of the real dollars involved would dictate that Yahoo! wasn’t even able to even get a "Mid-$20’s valuation" from even a consortium of other media giants.  At $28.60, Yahoo!’s market cap is roughly $40 BILLION.

Over the last 5-year period, Yahoo! shares barely saw $40.00 and anything over $35.00 was long before the Google (NASDAQ: GOOG) AdSense program came on like an avalanche pouring down the mountain. Jerry Yang’s is delusional about the value Internet and web giant, mainly because of that shear size of real dollars at this point.  But now on a standalone basis, Yahoo! is just an overvalued Internet behemoth that used to have a bidder.

Interestingly enough, Yahoo! shares might not really see that "mid to low teens share price" that many shareholders and market pundits have voiced.  Many will believe that Ballmer and Microsoft are going to come back with a lower hostile bid in the coming weeks or months.  But lower prices are almost as certain as a hot Texas summer. 

We recently highlighted IAC/InteractiveCorp. (NASDAQ: IACI) in our Special Situation newsletter, and this merger will have an impact on that call now.  Our Special Situation pick going out early Monday is Time Warner Inc. (NYSE: TWX), as this may change that landscape for web properties now. Keep in mind that not all of these are "Buy and Hold" calls, so merely knowing the name is different from knowing the call.

If you are a director of Yahoo! and if those media reports were true about board members contacting lawyers and insurance companies to find ways to cover themselves in case this bid blows up, then you were smart.  If you didn’t get any extra protection, well, let’s just say that you better have lined that up this weekend.  You will be hearing from lawyers and seeing class action suits.  In fact, it would be a minor miracle if the first class action lawsuit hasn’t been filed by Monday evening "on behalf of Yahoo! shareholders against the board of directors of Yahoo! for grossly neglecting the best interest of shareholders."

Jerry Yang has had the job title of "Chief Yahoo!" for some time. No more.  We’ll be nice and not say "Chief $%^&$#@&."  But if you are a Yahoo! shareholder, you’re probably thinking that Yang’s new title will be "Chief Pariah."  Yahoo! is going to have to make some advances in a serious hurry now tokeep that share price from cratering, but shareholders may want to tryto stop the company from getting aggressive. Otherwise, Yang andfriends may be leveraging the company up too much at a time that thecompany is in a position of weakness.

You can join our open email distribution list to hear about other mergers, special financings, IPO’s, secondary offerings, spin-offs, and more.

Jon C. Ogg
May 4, 2008

Jon Ogg is also a producer and editor of the "10 Stocks Under $10" weekly newsletter; he does not own securities in the companies he covers.