Msft / Yhoo

[lamborghini]

Cantor Fitzgerald notes that this morning, Microsoft (MSFT) extended an unsolicited offer to buy Yahoo! for $44.6B, or $31 per share, in equal parts cash and stock. They expect a deal to happen, perhaps at a slight premium to the current offer, given YHOO's weakened market position and MSFT's obvious need to become more relevant in the consumer Internet services / online advertising arenas. Nonetheless, they hold little hope that a merged MSFT/YHOO entity would radically alter the current competitive landscape .. in fact, they think the combined co could actually lose market share to GOOG and others over time, as product, infrastructure, and cultural integration challenges divert attention/resources from the critical areas of innovation and customer service, and as red tape/size/bureaucracy further increase time-to-market for new products/services.

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DJ reports the U.S. Justice Department said it is interested in reviewing antitrust issues associated with Microsoft's (MSFT) nearly $45 bln bid for the co and analysts expect other enforcement agencies to soon follow suit. "The antitrust division would be interested in looking at the competitive effects of the transaction," said Justice Department spokeswoman Gina Talamona. A federal judge this week extended by 18 months court oversight of Microsoft's market power, which began in 2002 after a landmark antitrust settlement. The potential acquisition of Yahoo raises even more questions on competitiveness about everything from search engines to online advertisements, analysts said. "If this deal goes through, there will be a lot of very close scrutiny, there appears to be lots of overlap," said Harry First, a professor at New York University's School of Law. "It's complicated and very big, and a lot of enforcement agencies will be interested."

[dn4911]

Thinking that there is opportunity here after reviewing some things including S&P Note:

$32.60 Microsoft has made a proposal to Yahoo to acquire all outstanding shares for $31 each in a cash and stock deal valued at $44.6B. We view this acquisition positively because it would help MSFT compete more effectively against Google in search engine and online advertising. Although the merger presents integration challenges, Microsoft identifies $1 billion of synergies in areas of online advertising yield, capital expenditures, and research and development. Microsoft expects the deal to close in the second half of of 2008, subject to customary approvals, and to be dilutive to EPS. /J. Yin

[lamborghini]

Oppenheimer believes MSFT offer likely to go higher, MSFT will have to offer $36 - 40 a share .. co announced that this morning MSFT made a hostile offer to acquire YHOO for $31 in cash and stock. However, based on our assumptions for cost synergies ($1.3B), the firm believes MSFT will have to offer $36 - 40 a share, suggesting 26 - 40% upside from current levels. Moreover, many people believe that YHOO turned down a $40-plus offer in early 2007.

[lamborghini]

Pacific Growth downgraded MSFT to Neutral from Buy following MSFT's bid for YHOO as the firm believes MSFT needs to increase its bid. They expect YHOO to initially reject the bid. They note that the typical multiple paid in the online advertising industry over the past few years has been in the 15 - 20X range, excluding the 35X multiple MSFT paid for AQNT last year in a competitive deal. With the transaction structured to be 50% in cash and 50% in stocks, they estimate that the dilutive impact of this acquisition at $31 per share is about 7- 8%

[dn4911]

By John C. Dvorak
Feb 1, 2008 14:00:00 (ET)

BERKELEY, Calif. (MarketWatch) -- If anyone thinks the Microsoft Corp.-Yahoo Inc. deal is getting past the European Union regulators, then they are crazy.

I'm stunned that Microsoft and Yahoo think they can actually do this deal. Stunned.

I admit that over the past year, despite warnings and rumors, I said that Microsoft (MSFT) would not make the mistake of buying and attempting to merge with Yahoo. It would be an impossible pill to swallow, a corporate culture marriage-nightmare, and an admission by both companies to ultimate defeat at the hands of Google (GOOG).

I was convinced that these two companies cannot be so stupid as to not know this deal is a bad idea.

I was wrong. That said, I also admit to being suspicious of Yahoo's Susan Decker who was given the president's job although her real specialty is mergers and acquisitions.

That in itself probably means that with a little tweaking, this should be a done deal. But is it really?
So let me stop the column right here.

Listeners to my podcast already know I was going to write about Microsoft and the inability of the company's stock to get a break despite the amazing profits pouring in from sales of Vista and Office.

In this regard I was going to praise Ballmer for turning on the jets and blame the EU competition commissioners for keeping a black cloud over the head of the company. Then this happens.

The EU must have a red alert horn sounding in Brussels now that this deal was announced.

If the EU is already throwing a wet blanket on Microsoft's party and, according to reports, plans more actions against the company regarding its browser strategy, then this merger will stop them in their tracks.

Heck, the directorate general for competition in the EU, Neelie Kroes, said she was going after the company in a recent BBC interview. She flatly said that the U.S. anti-trust folks are doing nothing about anything, so the EU has to step in. See related interview.

Now it's always possible with Microsoft that this Yahoo (YHOO) deal was never meant to be finalized.

This happened with the Microsoft attempt to buy Intuit (INTU) some years back. It may be a ploy to steal Yahoo technology or key employees.

It may be just to give the EU commissioners something big to chew on.

(You should note that with the Intuit deal Microsoft was never told not to do the deal. Once an investigation began, the company bailed out on its own. Why take a chance when you really do not want to do the deal in the first place? This model may be at work here.)

If the EU kills this merger, as it should, Ballmer will get out of this deal smelling like a rose and looking like an aggressive CEO doing what he can. He can say it was the meddling EU that ruined the deal. He can forever point the finger at the EU and perhaps get some leeway in future EU investigations.

That said, this is a merger of two of the most popular Web destinations and search sites in the world as well as being dominant players in free email, search, groups and content delivery. How is this NOT an anti-trust violation in someone's eyes?

Whatever happens this cannot be good for Microsoft stock, and if I held Yahoo I'd be out of it now while it's propped up by this deal.

The biggest risk for both companies, for sure, is that this deal does go through and they continue to collectively lose more and more market share to Google. It will be the ultimate humiliation for both Microsoft and Yahoo executives and become their final legacy.

So I will personally be stunned if this deal, in the end, passes muster and is actually consummated. In the process it could send the undervalued Microsoft stock into the tank where it can be fished out later.

Besides, what are they going to call this new company? Ya-soft? Micro-hoo? Yahmicrohoosoft? Yeah, that works.