Yahoo price tag hefty, but timing seems right

Microsoft would be paying a hefty price tag for Yahoo, should the troubled Internet portal accept its buyout offer — spending the equivalent of all its cash on hand and issuing more than 719 million new shares of stock.

But recent technology-industry deals suggest that Microsoft's $31-a-share offer for Yahoo isn't particularly out of line. And given conditions in the stock and credit markets, this may be as good a time as any for Redmond's Microsoft to absorb the iconic Silicon Valley company.

"You've got a company with a lot of money and a very liquid stock that really wants to buy something," said Brad Gevurtz, head of investment banking at D.A. Davidson in suburban Portland.

Microsoft valued its offer for Yahoo at $44.6 billion, which would make it the largest takeover of a technology company ever. (The 2001 deal that created AOL Time Warner was structured as an acquisition of Time Warner, a media company, by America Online.) Yahoo shareholders could choose whether to receive $31 in cash or 95.09 percent of a Microsoft share, subject to the condition that half of the total consideration be cash and half stock.

Assuming the $31-per-share price sticks — at least some analysts and options traders are betting Microsoft will eventually go even higher — that means Microsoft would have to fork out $22.3 billion in cash. As of Dec. 31, the company had almost $21.1 billion in cash and short-term investments on its books, though its operations bring in new cash at a prodigious rate — $4.6 billion in the second quarter alone.

And while the newly issued stock would be enough to float a good-sized company by itself, it represents less than 8 percent of the 9.3 billion Microsoft shares outstanding at the end of 2007. To put it in perspective: From December 2006 to December 2007, Microsoft spent more ($23.1 billion) to buy back more shares (768.2 million) from its own shareholders.

Mark Anderson, a technology analyst and adviser based in Friday Harbor, said there are better uses for the billions of dollars on Microsoft's books than just letting it sit there.

"At this stage, putting the cash into buying back shares is the wrong answer as well," Anderson said. "They're much smarter to put their money at work in chasing the river of money [in online advertising] than putting it in some kind of weird portfolio."

Paying cash

For much of the early part of this decade, Microsoft stock seemed stuck in the low- to mid-$20s, making it less attractive as a currency for acquisitions. When Microsoft has bought other companies, either in whole (like aQuantive) or in part (like Facebook), it almost always has paid cash.

But the shares began climbing in mid-2006, and hit $37.06 in November. Though they've come down, Microsoft has outperformed most of the technology sector: Before Friday, the shares were up 5.6 percent over the previous 12 months versus a 1.4 percent decline in the 79-company AMEX Technology Select Sector index.

Yahoo, meanwhile, lost nearly a third of its value, closing at $19.18 before Microsoft's offer was revealed Friday morning. It gained $9.20, or nearly 48 percent, in Friday's trading.

"They're definitely putting a bear hug on Yahoo, and heaven help Yahoo management if they go to shareholders and say 'We can right this ship — stick with us,' " said Brenon Daly, a financial analyst in the San Francisco office of The 451 Group, a boutique technology- research firm.

At least two analysts, from Oppenheimer & Co. and Stanford Group, were quoted as saying they expected Microsoft to raise its bid to anywhere from $35 to $40 a share. Activity in Yahoo options suggested that at least some traders are willing to take that bet: April $30 call options soared from 12 cents on Thursday to $1.70 on Friday, and July $32.50 calls jumped from 22 cents to $1.15.

Other suitors?

However, there don't appear to be any other obvious industry suitors for Yahoo on the horizon. And private-equity firms, which might have leapt at the chance to take over Yahoo a year ago, have been largely sidelined by the turmoil in the credit markets, with their access to investment cash largely cut off.

"This is kind of a refreshing thing — old-style M&A," said Gevurtz, of D.A. Davidson. "Company A wants to buy Company B, there are good strategic reasons to do it, and they won't have to fight off a lot of private-equity guys playing with other people's money."

Even if Microsoft's ploy succeeds, he added, it's not necessarily a harbinger of more jumbo-size deals.

"There's some truth to the adage that big deals beget other big deals," he said. "But to say that Microsoft is spending $40 billion to buy Yahoo, so now GM will buy Ford — you don't necessarily get that."

It may, however, herald more unfriendly takeovers in the tech industry, where historically they've been rare. Hostile bidders were deterred by fears that their target's chief assets — their brainy employees — would walk out the door.

But Oracle, which has won bitter battles for both PeopleSoft and BEA Software, has demonstrated that economics can trump workplace culture.

"The fact that [Oracle CEO] Larry Ellison was able to push through two of these deals means the market is rewarding efficiency," Daly said. "The technology industry is maturing, and that environment favors consolidation plays."

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com