Going Hostile .... And Killing Value

Microsoft is once again stating that is may go hostile in its bid for Yahoo!. If press reports (and rumors) are correct, Microsoft is considering $33 per share, a value I have long felt was fair, and a value that would get the deal done. Maybe I am wrong, given the personal pride and level of greed that has entered the equation for each company. Major shareholders of Yahoo! are apparently now saying they want a $35-$37 per share offer, essentially twice the value of Yahoo! before the bid. Ah, we can dream.

Ballmer has reacted to recent price levels by saying that he will not pay a dollar more than what the company is worth. This of course sounds good, but also gives him the ability to raise the bid if he feels there is suddenly more value. Unfortunately, we may have reached a point were you have to wonder whether any of this is good for anyone. As discussed before, hostile bids typically have many unintended consequences, most if not all of which are negative. A higher bid would also not be looked upon favorably by many current Microsoft shareholder, all of which have seen the recent momentum in their stock halted, and even depressed, as the Yahoo! takeover attempt has played out.

So should Microsoft drop the hostile bid? Not exactly. Given that Yahoo!, its board, and major shareholders seem to be getting a little greedy, Microsoft may have even more leverage. Going to $33 or $34 a share, above the original $31 offer (that is not exactly $31 anymore), would represent a 10% move above an already attractive offer. If Yahoo! would once again reject a higher offer, Microsoft would then have more reason to go hostile by nominating a new slate of directors, the only real possible option given the poison pill in place at Yahoo!. In the end, Jerry Yang may be out, one way or the other. Either he sells his company to Microsoft, is taken over in a successful hostile bid, or wins the takeover attempt, only to see Microsoft walk away, leaving him and his shareholder holding a victory flag worth half its previous value.

Tickers: MSFT, YHOO