Now that Microsoft has walked away from its $47.5 billion offer for Yahoo, could the software giant come back later and still snap up its Internet rival?
It’s possible but highly unlikely, say analysts surveying the wreckage of Microsoft’s failed effort to close the deal.
”By pulling the deal, Microsoft hasn’t foreclosed it,” says Citigroup analyst Mark Mahaney, who estimates there is a 15 percent chance a Microsoft-Yahoo deal will still happen. “I think that Yahoo missed a great opportunity.”
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Microsoft could make another run at Yahoo in a few months, especially if Yahoo reports weak earnings for the current second quarter, driving its stock price even lower. Then Yahoo could be ripe for a takeover at a lower price than the $33 a share that Microsoft ultimately offered over the weekend before withdrawing. As it is Yahoo stock fell 15 percent Monday to close at just over $24 a share.
Many analysts were dismayed — and even angered — by Yahoo’s hardball negotiating strategy. For example, ThinkPanmure analyst William Morrison wrote in a weekend report that the Yahoo decision “may likely go down as one of the more destructive decisions for shareholder value in the history of Internet stocks.”
Standard & Poor’s equity analyst Scott Kessler, says he is “surprised that the Microsoft-Yahoo deal fell apart. If an analyst says they weren’t, they’re lying.”
Yet he quickly adds that “time is of the essence with Microsoft.” A hostile bid could have taken months and would have faced regulatory hurdles. The deal would not have been done until mid-2009, he said.
Still, Yahoo Chief Executive Jerry Yang left the door open to a possible deal with Microsoft. “If they have anything new to say, we would be open," he told Reuters in an interview late Monday. "I am more than willing to listen.”
“We were negotiating a way to find common ground, and then on Saturday they chose to walk away,” said the 39-year-old co-founder of the pioneering Internet company. “They started it, and they walked away.”
Shock waves from the deal's collapse are still registering with shareholders.
“We’re disappointed,” says Ryan Jacob, the manager of the Jacob Internet Fund, which owns 150,000 shares of Yahoo. He says that he would have voted for the Microsoft offer and that Yahoo’s demand for at least $37 a share, $5 billion more than Microsoft's offer, was “unrealistic.” He said he wishes the Yahoo board had taken a more active role.
In the past, shareholders have helped force companies into a shotgun marriage. For example, Oracle CEO Larry Ellison won control of PeopleSoft and BEA Systems when shareholders ultimately supported his offer over the objections of company executives.
“This is going to play out over the next several months and there is still a chance Microsoft will buy the company for somewhere around $33 a share,” Todd Dagres, general partner at venture capital fund Spark Capital, told Reuters. “What Microsoft is hoping is that Yahoo shareholders get militant.”
But shareholders may not be able to force the deal here.
For one thing, Yahoo is incorporated in Delaware, where some analysts say that it’s harder for shareholders to win cases against corporations. Also, Yahoo does not appear to have a high-profile shareholder activist like Carl Icahn, who helped broker the deal with Oracle as a BEA Systems shareholder.
Jacob says that, for now, he’s still going to hold onto Yahoo shares. But he doesn’t see how Yahoo is going to climb back into the mid-30s price range.
And analysts say that although Yahoo is technically in play, there are no other likely suitors. “The reality is that no one else has the money that Microsoft has,” says Kessler, of S&P.
Jacob and some other analysts say CEO and co-founder Jerry Yang never wanted to sell to Microsoft. Yahoo is the company that Yang started and nurtured and he was more than reluctant to have it swallowed up by giant Microsoft.
Still, some analysts think that Yahoo! can pull off a turnaround with Google’s help.
Yahoo is counting on a deal in which it will outsource its search ad business to Google. That deal could bump up Yahoo revenues by as much as 70 percent in 2009, according to JP Morgan.
But it is no sure bet: Federal regulators are reviewing the proposed deal for potential antitrust implications.
“You can throw away lots of money trying to fend off Google,” says Jeffrey Lindsay, an analyst at Sanford Bernstein. “But on the Internet the guy who gets the biggest share first is usually the winner.”
He thinks Yahoo will link up with Google soon to appease investors. Yahoo then could use the billions in cash that the deal would generate to invest in new businesses.
Time Warner's AOL unit and Yahoo are still talking too, says Lindsay, but that deal would be “more complex to negotiate.”
If Yahoo fails to make rapid progress, Microsoft will again have an opening to nab Yahoo as shareholders start agitating for change. “This is going to end up being a colossal mistake for Yahoo,” says Kessler.
What’s the lesson to be learned?
“Two big companies got stubborn in the end,” says Gene Munster, an analyst at Piper Jaffray. “Unrealistic expectations need to be set aside.” Easier said than done.