OMG! When I saw the news that Microsoft was making an unsolicited offer to buy Yahoo, I nearly choked on my coffee.
What gives?
The $44.6 billion offer by Microsoft represents a premium of 60% of Yahoo’s current value, but only matches Yahoo’s value as recently as October, 2007.
If this type of activity isn’t criminal, it should be.
Yahoo was a finalist to be in my top 10 stocks for 2008. Why? Because I thought the stock had a chance to double in value on its own and that eventually the stock would be acquired by, yes, Microsoft.
Now, one month into the year, and we get this.
OK, a 60% premium is nothing to sneeze at, but Yahoo is worth more in my humble opinion. If I owned the stock, and I don’t, I would be upset by this news.
I need to take a deep breath. Seriously, I am aghast.
Adding insult to injury, the announcement of the offer resulted in Microsoft shares trading some 4% lower at the open. Mr. Market never does like acquisition premiums and will almost always penalize the acquiring firm.
Now that I’m breathing again, I feel that familiar tingle of opportunity.
Taking Microsoft down is a reflex by the market that is completely emotional and not factual.
People, Microsoft is stealing this company! Under the guise of paying a premium, Microsoft immediately solidifies its position against vaunted rival Google. Already a player in search, owning Yahoo puts Microsoft in a winning position.
Why is that important? Take a look at Google’s valuation. At some 40 times earnings, Google has rightly earned a huge premium in the market that will not disappear anytime soon (even if results disappointed last night).
Microsoft trades for less than 20 times earnings. In making Microsoft one of my top 10 picks for 2008, I believed that such a multiple was too low for a company of Microsoft’s stature.
With Yahoo in play, bought at a discount to value, Microsoft’s march towards a higher market multiple can begin in earnest. 30 times earnings would seem to be just right if one assumes that Google’s multiple decompresses.
Enough of my ranting, check out what some of our advisors are saying about the troika in search – Google, Yahoo and Microsoft! You won’t want to miss a word on these important developments.
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