The Wall Street Journal-20080205-Searching Yahoo for Value- A Delicate Deal Game- Fight Off Microsoft Or Jostle for Higher Bid-
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Searching Yahoo for Value; A Delicate Deal Game: Fight Off Microsoft Or Jostle for Higher Bid?
Full Text (737 words)If credible bidders don't emerge to challenge Microsoft Corp.'s $44.6 billion offer for Yahoo Inc., the Web titan will likely have to resort to a tried-and-true method for securing a higher price: playing hard to get.
Though Microsoft has signaled a willingness to "go hostile" by nominating its own slate of directors to take over Yahoo's board, such a course would be risky, especially because Yahoo could try to scuttle a deal by raising antitrust issues.
To avoid a protracted fight, Microsoft is more likely to raise its offer price and try to secure Yahoo's cooperation. Typically, boards of directors demand that a buyer pay at least the company's 52-week intraday high. That would be $34.08, 10% above Microsoft's $31 a share offer and 16% above where it moved yesterday, to $29.33.
But to get a sweetened offer, Yahoo will have to resort to some big- deal brinksmanship, where threats, rumors and public pressure all are designed to force a buyer's hand.
The first battleground is over some of the most basic steps of valuing Yahoo. The company's investors have argued that Microsoft's $31-a-share offer understates Yahoo's cash and minority stakes in Yahoo Japan Corp. and other companies. The market value of those assets is $16.7 billion. Some investors say these assets alone are valued at $12 a share.
But that calculation doesn't include an adjustment for the tax hit Yahoo would take if the holdings were sold. The figure also doesn't include an illiquidity discount, which accounts for the difficulty associated in selling off large stakes at one time. Meanwhile, Yahoo prefers to calculate its headline profit number -- earnings before interest, taxes, depreciation and amortization, or Ebitda -- before stripping out stock-based compensation.
But accounting for that cost in the Ebitda calculation, as many companies do, reduces the result by about 30%. In 2007, for example, Yahoo's Ebitda totaled $1.93 billion before the compensation charge and $1.36 billion afterward.
By the rituals of mergers and acquisitions, companies are generally loath to disparage a buyer's antitrust position; that could put both companies in a difficult spot if a deal is consummated. Instead, target companies almost always focus on price and are eager to show their shareholders they are fighting for more. But that path typically leads to a deal, as price demands can be easily met -- especially by a buyer with Microsoft's resources.
"If Microsoft pays a few more dollars, [Yahoo CEO] Jerry Yang could say he got a good price for his shareholders, and everyone would walk away happy," said one banker.
It could take weeks to get to that point, however. Yahoo repeated yesterday that it was "carefully and thoroughly evaluating" the offer. Behind the scenes, it was canvassing the corporate landscape for other bidders.
Yahoo has fielded a number of expressions of interest across a wide swath of industries, said one person familiar with the matter. While those discussions may result in further offers, many bankers said it would be difficult for another party to match Microsoft's buying power.
News Corp. chief Rupert Murdoch, for instance, said on a company conference call yesterday that the media conglomerate -- and owner of Wall Street Journal publisher Dow Jones -- wasn't interested in bidding for Yahoo.
Google Inc.'s offer to help Yahoo last week has prompted speculation that the two might enter some kind of partnership involving search advertising. But some analysts believe such an arrangement wouldn't survive regulatory scrutiny.
Microsoft is holding firm on its offer, which is expected to be financed in part with public debt offerings. People in the company's camp argue that the offer values Yahoo's core operating business (a calculation that doesn't include its minority interests) at a more than 100% premium. The company also has lost market share in recent quarters, and its overall performance has disappointed many investors.
Others argue that the offer doesn't adequately account for another key fact -- synergies. A combination of the two companies would result in annual synergies of $1.3 billion, 30% above Microsoft's estimate, says Sandeep Aggarwal an analyst with Oppenheimer & Co. Inc., which makes a market in Yahoo and Microsoft shares. "There is no other company that wants Yahoo more than Microsoft. They would be willing to offer a higher price," Mr. Aggarwal says. Mr. Aggarwal believes Microsoft will have to raise its offer into the range of $36 and $40.
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Robert A. Guth contributed to this article.
