Yahoo Rejects $45 billion Offer from Microsoft

123jump.com Staff
11 Feb, 2008
New York City

Yahoo rejected $45 billion offer form Microsoft and held out for a better deal from Microsoft in the abscence of competing bid. Yahoo is looking for at least $50 billion or $34 per share. Yahoo is also looking for its to stay independent and may consider outsourcing its search business to Google and acquire portal AOL online ad business. Yahoo edges higher and Microsoft falls after the formal deal rejection.

[R]12:00PM New York – Yahoo hopes to get more than $50 billion offer from Microsoft and evaluates other alternatives to remain independent.[/R]

Yahoo formally rejected offer from Microsoft indicating that nearly $45 billion offer “substantially undervalues” Yahoo. Microsoft edged 1.7% lower and Yahoo edged 1.1% higher.

“The Board believes that Microsoft's proposal substantially undervalues Yahoo! including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments”, the press release from Yahoo noted.

Investors appear to be divided in two camps, in one camp investors believe that the deal will be difficult to consummate and two company cultures sharply different. In the second camp, investors believe that the deal will provide Microsoft an opportunity leverage a common advertising platform and garner larger share of online advertising market.

Yahoo appears to be pursuing limited alternatives including the one to outsource its search ads and technology to Google, if U.S. anti-trust approves such a deal. Yahoo, portal, garners a large share of display advertising, but has failed to leverage to increase revenue in the other forms of ads such as text links or search based ads.

Microsoft offer is at 62% premium to the Yahoo stock price before the offer may be hard to beat. In the absence of another offer on table Yahoo board may have a tough time to convince shareholders to reject this offer. Yahoo stock has languished in the last one year and drifted to $20 range as investors increasingly appear impatient with management turnover and a lack of progress in the search related business.

Yahoo board is likely to argue that its European business and stakes in Alibaba.com and Yahoo Japan alone are worth more than $17 per share and the current offer does not reflect valuations of these businesses.

It appears that Yahoo is looking for an offer that is higher than $35 per share which will increase the value of the company above $50 billion. While Microsoft has the ability to pay such a price, justification of the deal becomes harder. If the online ad markets slows in the near future and the integration of the two companies takes longer or harder to achieve, impatient Microsoft shareholders may punish the stock.