Microsoft shows muddle on Yahoo!, says ICAP's Sachin Shah; hedge funds sue Clear Channel lenders

By Paul A. Harris

St. Louis, May 2 - Confusion surrounds Microsoft Corp.'s stock and cash bid for internet search giant Yahoo! Inc., Sachin Shah, special situations analyst for ICAP Securities, asserted on Friday.

Shah added that Microsoft CEO Steve Ballmer bears a good share of the responsibility for that confusion.

"The market doesn't understand what's going on because Ballmer has been sending mixed messages," Shah told Prospect News.

"First he said he was committed to the deal for an implied $31 per share.

"Then he threatened to reduce the bid and wage a proxy fight.

"Microsoft needs to do this deal, and do it quickly," the analyst added.

"And it's best for them not to engage in a proxy fight which would disenfranchise shareholders who own both Yahoo and Microsoft shares, and disenfranchise employees."

It probably gets done

In a report published Thursday ICAP reiterated its Yahoo! "buy" rating and its $37 per share target price, and expressed confidence that Microsoft needs Yahoo!

"There is a low probability that Microsoft will walk away from the deal," the report stated.

ICAP believes that the deal would be earnings neutral for Microsoft shareholders at $42 per share.

However Shah reasons that a report in the Wall Street Journal asserting that Ballmer is willing to up the bid to $32 or $33, citing an unnamed source close to the situation, may have been an intentional leak on the part of Ballmer and/or the Microsoft board.

"Conventional wisdom dictates that Microsoft intentionally leaked that $32 to $33 idea," Shah said.

"But it doesn't make sense that they waited all this time and only increased it by one or two dollars.

Time of the essence

Shah said that on Thursday Google announced it is seeking to partner up with IBM to sell web-based applications, such as Google Docs, to large businesses.

He added that the market has been slow to appreciate the potential impact of such a partnership on Microsoft. And he reasons that the possibility that Google and IBM could impinge upon one of Microsoft's core businesses by making available cheaper web-based alternatives to products such as Microsoft Office, puts even more pressure on Ballmer to get the Yahoo! deal done in order for Microsoft to make meaningful inroads into search advertising.

Also, Shah pointed out, Google could announce that it will begin putting its advertising on Yahoo's platform as early as next week.

The analyst also believes that Yahoo! tends to be underrated as a stand-alone entity.

"Yahoo is an oligopoly that is going to generate between $900 million and $1 billion of free cash this year," he asserted.

"Even if you don't believe in the growth of Yahoo's free cash flow you have to believe that the business is not declining. It's priming itself for another revolution."

That revolution will involve internet advertising.

Shah asserts that, in valuing Yahoo, investors have been too focused on the company's declining share of internet searches, while Google's share is increasing.

He contends that it is common ground among Google, Yahoo and Microsoft that search alone is a diminishing part of the picture.

The growth will be in online advertising, as all three parties have stated.

On Friday shares of Yahoo (Nasdaq: YHOO) gained 6.92%, or $1.86, to close at $28.67.

Meanwhile shares of Microsoft (Nasdaq: MSFT) fell 0.66% to close at $29.21, off by $0.19.

Clear Channel: more suits

The troubled LBO of Clear Channel Communications Inc. (NYSE: CCU) became more litigious, according to a special situations equities analyst who pointed to a New York Post story, published Friday, reporting that two big shareholders have become involved in the melee of lawsuits filed in the situation.

Hedge fund Pentwater Capital Management filed suit in Texas against the deal's lenders, demanding they pay damages for "tortuously interfering" with the LBO by Thomas H. Lee Partners (THL) and Bain Capital.

Meanwhile Highfields Capital Management, which is reported to be Clear Channel's largest outside shareholder, was expected to file a similar suit.

The Post reported that the Pentwater suit also accuses the banks, which include Wachovia, Credit Suisse, Royal Bank of Scotland and Morgan Stanley, of "spreading lies and rumors" about the private equity firms' desire to close the deal.

Clear Channel itself is suing the lending banks, which include Citigroup, Deutsche Bank, Credit Suisse, Morgan Stanley, RBS Greenwich Capital and Wachovia, in Bexar County, Texas, district court for failing to fund the deal.

And Clear Channel's buyers, Bain Capital and THL, filed suit in late March in New York to force the banks to provide the $22.1 billion of financing.

An analyst who covers Clear Channel told Prospect News on Friday that with the June 12 walk-away date approaching the Clear Channel situation is beginning to take on the aspect of a game of "five-dimensional chess."

This source said that Highfields increased its stake in the company in January, perhaps indicating that it may have a view that the deal will ultimately get done.

However, the source said, Clear Channel, at this point is "undiligence-able."

The analyst added that any tampering with the terms, such as decreasing the tender offer from the original $39.20 per share, "could set off a Pandora's Box."

The source also said that motives among some of the players in the Clear Channel deal are difficult to parse.

"Even if the equity guys are suing to get the deal done does it really mean that they want the deal to get done?

"And do both private equity firms have the same view?

"My sense is that Thomas Lee is more inclined to do the deal than Bain."

Shares of Clear Channel (NYSE: CCU) ended the Friday session up 1.49%, or $0.46, to close at $31.27.

Friday's closing price is 9.7% higher than Clear Channel's closing price on April 21.

Friday's situations took place against a backdrop of mixed, see-saw trading in the major U.S. indexes on Friday.

The Dow Jones Industrial Average ended the session having gained 0.37%, or 48.20 points, to close at 13,058.20, after having traded as high as 13132.46 and as low as 12981.83 on Friday.

The S&P 500 gained 0.32%, or 4.56 points, to close at 1,413.9.

However the Nasdaq lost ground on Friday, closing 0.15% lower at 2,476.99, down 3.72 points.

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