Maybe a Pine Tree

Ahknaten -- Ya Microsoft!

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I remember hearing about a Microsoft and Yahoo merger back in May '07, and I thought of the same question -- would they change the name to 'Microsoft!' (with the Yahoooo signature commercial tune)?

In Apr. '07, Yahoo stock fell from $32 to $28. Rumors were circulating that Microsoft would acquire it for $50 billion and the stock shot up to $31.

In Jan. '08, Yahoo fell to $19 after earnings were announced. Shortly after, Microsoft makes a $44.6 billion offer and Yahoo stock rises to $29.

The offer came after Yahoo had a drop both times. The 2nd offer was less than the rumored first offer.
Was Microsoft waiting for the drop before the offer? After all, an offer at a stock price of $19, might be much more appealing than a stock offer at $28? Wouldn't the stockholders be more likely to agree the 2nd time around?

Would you like to hear a strange idea?

Is it possible that Yahoo released bad news, knowing that it would lower the stock price, Microsoft would give another offer, the directors would like it, and shareholders might agree to it? I dunno.

Is it a smart move for Microsoft from a competitive aspect? Perhaps.
Are they paying too much for it? Probably.
Is the internet giant, Google, complaining too much? Probably.

If Google complains and the deal goes through, then it creates competition. Increased competition creates decreased margins for Google and Google's stock drops.

If Google complains and the deal doesn't go through, then the Yahoo stock drops. Yahoo's rich valuation doesn't look as good, which in turn reflects Google's stock, and so Google's stock drops.
So, I think Google is a nice short (but do your own due diligence).

What do I think of the valuation?

Would you like to be an analyst? Just multiply EPS*PE = target price. A lot of analysts do that and talk a lot to justify it. I dislike that method.

I make DCF models using a product called 'eVal', which comes in a textbook by Sloan and Lundholm entitled, 'Equity Valuation and Analysis'. I watch my terminal figures and create a model that matches the EPS estimates from analysts, but I like my valuation models a bit more. When I make the model, I get a target price of $9.

Yahoo is overpriced. Sell. Microsoft is paying too much.
At least it is Microsoft buying Yahoo and not AOL buying Time Warner. If Google was buying Microsoft then I'd surely complain.
Although I think they are paying too much, it looks like Yahoo could help Microsoft's future.
As for Google, the company has a tremendous amount of insider selling. High priced stock, insiders selling. Sell.

Ya - Microsoooo-ooooft !