Parks Associates Blog

Monday, February 04, 2008

Will Yahoo Survive as An Independent?

Last Friday, Microsoft’s unsolicited bid for Yahoo made many Yahoo investors very happy. Long-battered Yahoo stock price soared nearly 50% in one day with surging trading volume. But the closing price on Friday fell about $2.50 short of the bid per-share price offered by Microsoft, partly due to Microsoft’s stock price decline that day (a portion of the deal is financed by Microsoft’s stock), partly a reflection of market’s concern that the deal might not consummate in Steve Ballmer’s way.

There are many questions raised by this bid, anti-trust concerns, integration difficulties due to overlapping businesses, culture clashes, etc. The prospect of the deal is further clouded after Google manifested its objection to the deal during the weekend and rumor has it that Yahoo is considering allying with Google as a means to repel Microsoft’s offer.

Will Yahoo remain independent? Suitors for Yahoo are just a couple in this world. Google is one, but Google’s bid for Yahoo will face stiff anti-trust scrutiny that Google has to make substantial asset divestitures to satisfy regulators. Microsoft is making its largest bet ever, but clearly Yahoo saw the offer price a little lean. Its “strategic alliance talk with Google” might force Microsoft to raise the bid.

Therefore, it all comes down to how badly Microsoft wants Yahoo. At a good price between $35 and $38 a share, Yahoo is likely to surrender its independence under the pressure from shareholders, given the company’s poor track record of boosting search advertising revenue and its vulnerability to a downturn in the display ad market.


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