When news broke on Friday that Microsoft was doing an unsolicited $44,6 billion takeover bid for Yahoo!, first I was not surprise because this rumor has been around for a while but what I was surprise about was the price they were willing to pay, $31 a share, half in cash and a premium of 60% to the current trading price. I thought that it was a very desperate move to be willing to pay that much premium and that it was a very large acquisition even for Microsoft. After looking at initial projections of synergies and size of combined business, it even made less financial sense. Strategically, it does make sense. The Internet business is a scale business, so the larger you are in terms of properties and eyeballs, the larger your inventory is, the larger the advertisement network you can create (see how happy Madison Avenue is about this
) and the more efficient your R&D and infrastructure investments are. This is the power of network effects that Microsoft has mastered in the desktop and office applications space. Also, there are interesting, less obvious synergies in domains like Web email and instant messaging (with the possibilities that a social networking spin can add to those applications) where the combined company is going to have a very large market share. I think that people is very focused on search these days but they are underestimating that a large share of online advertisement is going to come from other non search properties and the combined Microhoo is going to be the market leader in most of them. Also, there are interesting regional synergies since Yahoo! is stronger in Asia and Microsoft in Europe and Latam so when the online advertisement market takes off in those countries to the level of the US, Microhoo will be better prepared to capture that revenue (again, except in search even though in China and Japan Yahoo! has a good position there as well). So back to the financials, why the huge premium? Apparently, Ballmer had made a friendly offer for Yahoo! few months ago that was reject by the board so looking at Yahoo! stock price, you can see that it has significantly drop in the recent months. In other words, Microsoft was ready to pay something around this price few months ago. Also, being this an unsolicited bid, they need to convinced a large amount of shareholders to go along and therefore, you need to pay a premium not only above the current price but above the average price for the recent period. Yahoo! stock has been trading between $35 and $25 during the last two years. So $31 is probably the price they have calculated to get a sufficient number of shareholders happy to go along the bid. As for how to pay this, Microsoft has no long term debt, generates close to $20 billion in cash flow from operating activities a year, and has a market cap of $280 billion (after a 6% drop on the news on Friday) so they will be paying less than 10% of that in shares. Summarizing, they can easily afford it. The other interesting financial point is that the revenue of the combined company will be less 10% of Microsoft total revenue so this shows their understanding that the future is the Internet and even if they manage to keep a decent cash flow generating business (actually, a great one in fact) from Windows, Office, enterprise apps and Xbox, they still need to be a leader on the Internet to protect the future of the company. So in my opinion, a great, bold, forward looking move from Microsoft.
CD
Ok to all financial analisys but it have to be taking in account two things that affect these projections:
1. From an organizational and company culture point of view, "the Yahoo" absorbed by Microsoft WILL NEVER BE the same Yahoo as it is now: the better and most innovative people will leave: The company culture of the two companies is too different...
2. The customers will shift. The Microhoo customers won't be the result of adding the Microsoft customers + Yahoo customers, but a totally different customer. I'm not sure that Microsoft would gain all the customers that Yahoo have nowadays in the markets that you mention that this will happen...
Posted by: Oriol | February 07, 2008 at 06:52 PM