Could Microsoft Walk Away From Yahoo!?


As outlined in our recent letter to the Yahoo Board, unless we make progress with Yahoo towards an agreement by this weekend, we will reconsider our alternatives. We will provide updates as appropriate next week. These alternatives clearly include taking the offer to Yahoo shareholders or to withdraw our proposal and focus on other opportunities……

Chris Liddell, CFO, Microsoft, in Microsoft’s earnings conference call Thursday April 24

If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo! board.

Steve Ballmer, CEO Microsoft, in a letter to Yahoo!’s board, Saturday April 5 – 3 weeks ago tomorrow

Even though Microsoft’s offer to Yahoo! represents compelling value by almost any measure, I am starting to believe, along with  others, that this deal isn’t going to get done. 

What it comes down to is that Yahoo! regards Microsoft as the anti-thesis of everything they are and everything they stand for.  Microsoft is the old guard, the status quo, the epitome of corporate, while Yahoo! regards itself as innovative, young and entreprenurial.  Jerry Yang doesn’t want any part of Microsoft – no matter what the price.

On the other hand, Microsoft senses this, they understand that Yahoo!’s response is rooted in disdain, and their pride is hurt.  They’ve put forward an incredibly generous offer for Yahoo! including the promise of a combined company to take on Google.  And they’ve been made to feel like untouchables for doing it. 

At this point, like any spurned suitor, they’re probably inclined towards the attitude of “Well, we don’t need you anyways” and walking away (for another application of dating psychology to financial markets see my “How Not To Break Up With Your Girlfriend”, Top Gun FP, December 12, 2007).

The three week deadline referenced in Balmer’s Saturday April 5 letter is tomorrow.  And in the conference call yesterday evening, CFO Chris Liddell said that unless they make progress by the weekend, Microsoft will reconsider its options including taking the offer to Yahoo! shareholders or walking away.

If they do rescind their offer, Yahoo!’s share price will collapse.  Yahoo! shares closed around $19 on January 31, the day before Microsoft made it’s $31 a share cash and stock offer

Microsoft shares, by contrast, will probably jump.  Shares closed at $32.50 on January 31st but the $44.6 billion bid for Yahoo! ruined the stock.

Disclosure: Top Gun is long Microsoft (MSFT) shares and short Yahoo! (YHOO) shares.

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