Yahoo's stock took a beating Monday after Microsoft withdrew its $47.5 billion takeover bid, but the punishment wasn't as severe as many...
SAN FRANCISCO — Yahoo’s stock took a beating Monday after Microsoft withdrew its $47.5 billion takeover bid, but the punishment wasn’t as severe as many analysts had anticipated because investors think the rivals eventually will renew their mating dance.
Microsoft has publicly indicated it will focus on measures besides buying Yahoo in its effort to make its Internet division profitable. But several analysts predicted the software maker will revive its offer in the summer or fall if Yahoo can’t snap out of a two-year funk that exposed it to an unwanted takeover in the first place.
“Should the frustration of [Yahoo] shareholders come to a boil, we believe [Microsoft] could re-enter the picture, essentially playing the role of the white knight,” analyst David Hilal of Friedman, Billings, Ramsey wrote in a Monday research note.
With similar opinions reverberating through the market, Yahoo shares shed $4.30, or 15 percent, to close Monday at $24.37. That wiped out nearly half the gain since Microsoft first made its bid public Feb. 1. The drop left the Sunnyvale, Calif., company’s market value about $12.5 billion below Microsoft’s last offer.
Most Read Business Stories
Yahoo’s stock was $19.18 before Microsoft’s offer.
“I was expecting to see a more extreme reaction” to Microsoft’s withdrawn bid, Stanford Group analyst Clayton Moran said. “Microsoft is trying to make it seem like it’s not coming back [with another bid], but this somewhat muted reaction shows the market isn’t buying it.”
Meanwhile, Google, whose online-search dominance triggered Microsoft’s bid, seems poised to benefit no matter how talks go from here.
Microsoft ultimately offered $33 a share, only to be rebuffed over the weekend. Yahoo co-founders Jerry Yang and David Filo, who still own a combined 9.7 percent of the company’s stock, flew to Seattle to demand $37 a share — a price Yahoo stock hasn’t hit in more than two years.
The insistence on a higher price prompted Microsoft Chief Executive Steve Ballmer to yank the offer.
“We engaged with them and we wanted to find a way to get something done. But they walked,” Yang said in an interview Monday.
If Microsoft returned with a “real offer and a real proposal,” Yang said, “we would be happy to listen.”
Monday’s backlash was enough to turn up the heat on Yang and the rest of Yahoo’s board, which unanimously rebuffed Microsoft.
The unrest could lead to a rebellion at Yahoo’s annual meeting, where shareholders could try to oust the board. Late Monday, Yahoo set the meeting date for July 3 — an ironic date given the possible fireworks that could occur.
Meanwhile, lawyers for two Detroit-based public pension funds that sued Yahoo in February, alleging the company failed in its duty to act in shareholders’ best interests, said Monday they will amend their legal complaint to include the weekend’s events.
The suit will seek damages for the “massive loss in shareholder value caused by Yang and Yahoo’s board,” according to a statement from the firm Bernstein Litowitz Berger & Grossmann.
The blow to Yahoo’s stock also was cushioned by expectations the company will soon announce it’s turning over some ad space to Internet search leader Google, whose technology yields higher profits from commercial links.
But many analysts think working with Google could be a mixed bag for Yahoo. While Google could boost Yahoo revenue by anywhere from $850 million to $1.6 billion annually, it might also hurt Yahoo by undercutting the appeal of its own ad platform.
An alliance between Google and Yahoo also would cause regulatory headaches. Antitrust officials would take a hard look at the partnership because the companies combined control more than 80 percent of the Internet’s search-advertising market.
Win for Google
While analysts debated how Yahoo and Microsoft should proceed, most agreed Google will benefit from the aborted takeover attempt.
Unnerved by the prospect of its two biggest rivals joining forces, Google reached out to Yahoo to help thwart Microsoft’s bid.
Even if Google doesn’t end up selling ads on Yahoo’s heavily trafficked Web site, it has kept some of the Internet’s biggest services out of Microsoft’s clutches.
“We believe Google is a major winner given the failure of the Yahoo bid,” Stifel Nicolaus analyst George Askew wrote Monday. “Google is well positioned to continue to gain market share, benefit from any Yahoo [advertising] deal, and exploit any ongoing chaos at Yahoo and Microsoft.”
Google shares gained $13.61, or 2.3 percent, to close at $594.90 Monday.
Time Warner also appears to be in a better negotiating position if it decides to sell its struggling AOL subsidiary, as many analysts anticipate.
Yahoo had been mulling a possible combination with AOL’s online operations as a defensive measure against Microsoft. Now, Microsoft may make a run at AOL if it’s interest in buying Yahoo is truly dead.
And if Microsoft enters the picture, Google might offer to increase its 5 percent stake in AOL just to repel Microsoft.
A long list of Internet startups also could be in line for big windfalls if Microsoft and Yahoo step up their efforts to acquire more online weapons to challenge Google. And if Microsoft and Yahoo go shopping, Google has plenty of cash to get into bidding wars for potential takeover targets like Digg, LinkedIn and Facebook.
“Freed of one another, Yahoo and Microsoft are buyout prospectors: We would expect a rush-to-deal environment,” said BMO Capital Markets analyst Leland Westerfield.
Most analysts believe Microsoft has to make some kind of bold move after its online division lost $745 million through the first nine months of the company’s fiscal year.
“Any notion of simply returning to the original, pre-Yahoo strategy is likely to be insufficiently defined and credible,” Bernstein Research analyst Charles Di Bona wrote in a Monday note.
Analysts bet wrong
In a mild surprise, Microsoft shares fell 16 cents to $29.08 Monday. Most analysts thought the stock would climb because investors had driven down the shares during the last three months on worries that a Yahoo takeover would turn into an expensive mess.
If Yang wants to hold on to the CEO job he took on 11 months ago, he probably will have to show his turnaround strategy is compelling enough to propel Yahoo’s stock beyond $33 a share within the next year.
But Yang’s credibility has been undermined by Yahoo’s repeated forecasts of better times ahead while the company’s profits steadily eroded during the past two years.
“We are not willing to give [Yahoo] the benefit of the doubt that they can make meaningful improvement over the next three years,” UBS analysts Benjamin Schachter, Heather Bellini and Abhey Lamba wrote in a joint research note.
If Yahoo stumbles, that could entice Microsoft to return with another takeover bid that would be more difficult to turn down.