viernes, febrero 01, 2008

Microsoft buys Yahoo!?

I wake up with the news that Microsoft (NASDAQ:MSFT) has made an unsollicited bid for Yahoo! (NASDAQ:YHOO) at a price of $44 billion, or $31 per share. Let's see if I ever learnt something from my Corporate Finance and Strategy classes at the MBA. I think this is also a very good way of starting a new line of posts on current topics.

Yahoo! stock was trading at $19 yesterday. Today, after the announcement of the deal, Yahoo! stock has surged to $29, suggesting that the market is very confident that the deal will take place, and that this is the right price. Interestingly, when 10 days ago Yahoo! announced that it would make redundant 7% of its workforce (around 1,000 people), the stock climbed to $22 before going back to $19 after a couple of days, suggesting that the market did not believe this restructuring plan would do anything to improve Yahoo!'s profitability.

Let's take a look at Microsoft stock, then. It has gone down after the announcement, from $32 to $30.5. This implies that the market assumes that it is slightly overpaying for Yahoo! stock (the bid price represents almost a 60% premium over the trading price of Yahoo! stock in the last weeks), but not too much.

So, what does this all mean? In my opinion, it means that most probably we will see the advent of a YahooSoft. From a strategic perspective, this move makes some sense. Microsoft is a very well-run company, with interests in many business, out of which the online arena (whose revenues come, mainly, from advertising) are just one more. Microsoft's core profits come, let's not forget it, from domestic and professional software and applications (Windows, Office, etc.). Another big chunk of its revenues come from hardware (Xbox and other devices). And a fairly small bit comes from its online activities via advertising (MSN). And this is exactly where Yahoo!'s business is. Besides, Microsoft has had a lot of excess cash in its balance sheet. Lately it has started a big dividend and share buyback programme, but until then, basically it said that there were not interesting investment opportunities to use that cash for (some malign rumours affirm the cash was a provision to settle all the antitrust cases Microsoft is involved with).

Of course, investors will expect some synergies from the elimination of duplicate efforts in engineering, marketing, and so on. At the same time, there might be some increased cross-selling (like more integration of Yahoo!'s services with Microsoft's software products and platforms). Microsoft definitely believes there are, otherwise they wouldn't be paying such a hefty premium. Neither Steve Ballmer, nor Bill Gates (CEO and President of Microsoft, respectively) have ever shown desires to build an even bigger empire with the company funds, so the empire-building, size-for-the-sake-of-it classic motivation for M&A activity does not really apply. Looking coldly at them, they have been quite frugal in their expenses, actually.

The other interesting part of the deal is how it can affect its industry. Let's look at the competition, then, and see what this implies for them, and how have the markets reacted:

- Google (NASDAQ:GOOG) has been playing on a league of its own. It's better technologies make advertising in its platform much more targeted, and so advertisers have been willing to pay more for it. It has developed in short time a great number of different applications in order to drive traffice to its sites. However, that seems to have been slowing down recently, and so its stock is down 24% in the last 6 months. This deal can create a much fiercer competitor for them, and the market acknowledges this by driving Google's stock down from $565 yesterday to $520 today (8% loss in value).

- Ebay is another Internet powerhouse. Its revenues come from the fees people pay online when trading their products on Ebay's marketplace. The new situation should not affect it that much, at least not more than the troubles that it already has (its stock has been basically flat for the past 3 years). Its stock is up 7%, which is quite surprising, but might be due to other news (Meg Whitman, its current CEO, is stepping down and there is a new guy coming on board soon).

- Oracle is the second biggest software company in the world, after Microsoft. Its stock has not been afffected by this announcement, because they focus on coporate database software and enterprise resource management software (ERPs). Its stock is up 2%, basically the same as the Nasdaq index.

- Apple (NASDAQ:AAPL), another big software and hardware producer, has surprisingly not seen its stock move. It is as well an integrated software and hardware supplier (even more integrated than Microsoft). However, when you look carefully at it, its internet revenues come from other sources, mainly from consumers paying for audiovisual content acquired in their iTunes store.

- and finally, a big suprise. AOL Time Warner's shares (NYSE:TWX) are soaring 4.2% today (compared to around 1.2 for both the Nasdaq and the Dow Jones). Why is this?? Basically, the market is repricing the AOL component of Time Warner according to the relative multiples of the Microsoft-Yahoo transaction.

So what is the conclusion?? I think the Internet-software-hardware-media industry is going to be revolutionized by this move. Competition is going to be fiercer, and consequently some companies will be more successful, while other companies will suffer. But it's probably an interesting time to follow it....

All right! I think Damodaran, my professor at NYU Stern, would be proud of this analysis....

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