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February 10, 2008


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Victor Cook


So maybe Microsoft did massively undervalue Yahoo! Thanks for the insights and the useful links.


Richard Lewis

Victor, one large Yahoo investor, Legg Mason, which owns 80 million shares of the company--that comes to about 9 per cent Yahoo--said in a recent statement that MSFT should up its bid. The Legg Mason spokesman, Ben Miller, fund manager of Legg Mason Value Trust, cited reports (which he could not confirm) that MSFT and YHOO had been discussing a combination for well over a year. MSFT had been prepared to pay over $40 per share previously. One of my colleagues at ITT Technical Institute, where I teach, who has close ties to MSFT, characterized the MSFT offer as a "lowball."

Miller assessed the deal as a "strategic imperative" for MSFT. He put the fair value of YHOO as between $31 and $40. Miller went on to describe Yahoo as a “uniquely valuable asset.” His view, that Microsoft will “do what it takes to acquire it,” (Waters & Authers, February 12, 2008) fits with recent news reports that MSFT now plans a hostile bid for YHOO, going directly to the stockholders (Nuttall & Waters, February 10, 2008). This strategic imperative comes from what the Financial Times characterizes as MSFT’s “desperation” to reduce Google’s long and growing lead in Internet search and utilities (Lex, February 10, 2008). MSFT’s in-house strategy has failed, as your analysis has described. In such an instance, acquisition looms as a way to achieve competitive capability.

Nuttall, C., & Waters, R. (2008, February 10). Microsoft set to approach Yahoo shareholders. FT.com. Retrieved February 13, 2008, from http://www.ft.com/cms/s/8ca13fba-d80d-11dc-98f7-0000779fd2ac,dwp_uuid=e78ced54-d0bd-11dc-953a-0000779fd2ac.html

Waters, R., & Authers, J. (2008, February12). Yahoo investor warms to Microsoft’s advances. FT.com. Retrieved February 13, 2008, from http://www.ft.com/cms/s/42fb39d8-d9a2-11dc-bd4d-0000779fd2ac,dwp_uuid=e78ced54-d0bd-11dc-953a-0000779fd2ac.html

Lex. (2008, February 10). Yahoo’s last stand. Retrieved February 13, 2008, from http://www.ft.com/cms/s/1/a63ff48c-d80a-11dc-98f7-0000779fd2ac,dwp_uuid=e78ced54-d0bd-11dc-953a-0000779fd2ac.html


Since Microsoft intends to ask shareholders of YHOO if they want to sell for $31, then they should also ask shareholders of MSFT if they want to buy YHOO for $31.
As a MSFT shareholder, I would not approve the acquisition. YHOO's stock was 18$ before the offer. So, if YHOO didn't want to sell for $31, then, OK, next offer is $25. Regarding the calculations above, I think they are all wrong. Nobody would pay 50$ for a stock worth 18$.

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