MSFT + YHOO = 1 Bad Trade – Revised


I think Microsoft and Yahoo! must have underestimated how popular Google was. They also underestimated how long Google’s popularity would last. It must have been very painful for Microsoft CEO Steve Ballmer to watch Google’s share price do nothing but go up while he was sure to be thinking that either Microsoft would catch up or Google would falter.

Ballmer, for all his enthusiasm, did not follow the trend and he’s waited too long to do something. This type of thinking is the bane of making decisions based purely on fundamentals.

When you’ve lost as much ground to Google as Microsoft and Yahoo! have, the pain of watching Google anymore becomes unbearable. Eventually you capitulate and affect an act of desperation, in the classic sense, like Microsoft has just done. In this case one laggard, MSFT, has decided to acquire another laggard, YHOO, in order to better compete with Google.

Mr. Softy has offered a 62% premium over Yahoo’s closing price before the deal was announced. Without question, this is an act of desperation. They will spin it as “cleverly priced.”

True to form, Yahoo is officially “evaluating” the offer. They didn’t have a plan ready if such an offer was made. From a trading perspective, when the market gives you such a gain so fast (62% overnight) you take it and don’t look back. [That means you delete YHOO from your screen and forget regret about not catching the last fifty cents. Time to move on.]

Staying on this path of “evaluating” is more about the representing the collective egos of the key executives and not the best interests of the shareholders. That’s an emotional concern, not a financial one.

Within the last few days, YHOO stock was putting in 4-year Lows. That means before this announcement, Longs were selling and Short Sellers controlled the financial “line of scrimmage.” MSFT had a good Q4 chart-wise, but it’s choppy.

MSFT has offered $44.6 B for YHOO which has everyone talking. This is more “hostile takeover” than “merger” or “unsolicited offer.” This is a bad use of their money, regardless of how much cash MSFT has on its books. But, when someone is in fear, as MSFT is, they don’t act rationally regardless of how intellectually smart they are.

According to Yahoo! Finance, Google’s market cap was approximately $161B as of yesterday’s close. The share price had been as high as $747 per share and recently has been trading $200 lower off that high.

MSFT offered $44.6 B for 100% of YHOO – a company that is faltering and doesn’t seem to have a clear direction. Google on the other hand, although volatile, is the undisputed leader in the space. The amount MSFT is paying for YHOO is approximately 1/4 the value of Google.

The better trade would have been to acquire 25% of Google. Here’s the math: it’s better to own 25% of the clear winner that 100% of the C+ student…students who rarely evolve into A+ Students.

Buy “winners,” they usually continue to win. That’s how Trend Followers make huge gains.

Please note: I reserve the right to delete comments that are offensive or off-topic.