Analyst expects higher bid for Yahoo!; Aquila clears Kansas hurdle; China syndrome dogs 3Com

By Paul A. Harris

St. Louis, Feb. 13 - Yahoo! Inc. gained $0.31 in trading Wednesday as speculation surrounding the Sunnyvale, Calif., online properties and services company continued to hum along the wires.

A Wednesday morning story in the Wall Street Journal asserted that Google Inc.'s enthusiasm for a possible advertising tie-up - a move that might have staved off an unsolicited bid for Yahoo! from Microsoft Corp. - has waned.

A report which appeared later in the day on WSJ.com asserted that Yahoo! and Rupert Murdoch's News Corp. have been discussing a possible alliance which would give News Corp. a 20% stake in Yahoo!

Shortly after the Wednesday close an equity analyst who covers the internet software and services sector told Prospect News that Yahoo!'s share price (Nasdaq: YHOO), which closed at $29.88, up $0.31, or 1.05%, indicates that there is a belief that Microsoft's bid for Yahoo! will ultimately succeed, albeit at a higher price.

Expecting a better bid

The analyst, who spoke off the record, recounted that Microsoft's $31.00 per share offer ($44.6 billion), made on Feb. 1, is comprised of half cash and half equity with the equity portion equal to 0.9509 Microsoft shares based on Microsoft's Jan. 31, 2008, closing price.

Thus, the analyst continued, "if the deal were to close at the end of 2008 you're actually looking at a negative return, if you were to buy Yahoo! stock at the current market price, assuming that the deal goes through as it is right now.

"That implied return tells me that the market expects the bid to go higher, where you would get a decent arbitrage return - probably around 10%, or perhaps the low double-digits, annualized."

Hence, for anyone to buy the stock at the current level, if they expect that the deal will go through, they must be expecting the offer price to be raised, the analyst added.

"That's the more likely scenario, given Microsoft's strategic objectives."

A key piece

The analyst, recounting that Microsoft has been courting Yahoo! for a year, said that the Redmond, Wash., software giant wants to get the deal done and has the financial wherewithal to do it.

"Microsoft has invested heavily in online advertising over the past few years," the analyst said, adding that based on Microsoft's less than stellar share of the search market and the unexciting revenues of its online services division, the company has not made much headway.

"When you put those absolute numbers and the growth rates up against Google, the Microsoft numbers pale by comparison," the analyst said.

"And there is no doubt that Microsoft believes in the growth potential of online advertising.

"I believe they have really embraced the idea that 10 years down the line software, in general, will be served online, as opposed to being a packaged good like it is today.

"So Microsoft needs to move in that direction.

"The way to do that it by building a great online advertising business - one that goes directly to consumers, has a huge installed base of users, and has expertise in online communities.

"Yahoo! brings all of these things."

Meanwhile on Wednesday shares of Microsoft (Nasdaq: MSFT) gained $0.62, or 2.19%, to close at $28.96.

Shares of Google (Nasdaq: GOOG) gained $16.53, or 3.19%, to close at $534.62.

News Corp. (NYSE: NWS) shares gave up 0.5%, dropping $0.10 to close at $19.93.

Aquila: clear ahead in Kansas

Elsewhere on Wednesday shares of Kansas City, Mo.-based utility company, Aquila Inc. (NYSE: ILA), gained 2.6% to close at $3.55, 9 cents higher on the day.

According to a market source, the Wichita Eagle reported that in a settlement before the Kansas Corporation Commission, Black Hills Corp., which is acquiring Aquila's natural gas assets in Colorado, Kansas, Nebraska and Iowa, agreed to freeze natural gas delivery rates for Kansas consumers for three years, clearing the way for Black Hills to acquire Aquila's natural gas assets in the state for $143 million.

Black Hills (NYSE: BKH), meanwhile, saw its share price decline by $0.32, or 0.83%, to close at $38.43.

3Com sees the China syndrome

Also on Wednesday shares of 3Com Corp. (Nasdaq: COMS) advanced 9.71%, closing at $4.18, $0.37 higher on the day.

Market sources cited news reports that Bain Capital Partners has made concessions to the U.S. government aimed at obtaining national security clearance for the proposed $2.2 billion LBO of 3Com, a deal that has been impeded by the government because it would leave Chinese telecom Huawei holding a 16.5% stake in 3Com, which provides the U.S. military with sensitive technology services and equipment.

A market source told Prospect News on Wednesday afternoon that while Bain is likely offering to divest or wall-off 3Com businesses most critical to U.S. national security (such as 3Com's Tipping Point unit), the deal ultimately cannot have been helped by espionage charges which the U.S. Justice Dept. leveled earlier in the week against four people in the U.S. who are accused of spying for China.

This source also said that the 3Com deal could potentially become a political football, in the category of "homeland security," in the unfolding 2008 U.S. presidential contest.

The deal's China angle has not escaped the attention of conservatives, the source added, noting that Republican Mitt Romney, the former CEO of Bain & Co., and the co-founder of Bain Capital, who dropped out of his party's primary race last week, is reported to have taken heat from conservatives for failing to loudly denounce the 3Com deal.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.