Yahoo! surges on Microsoft takeover bid; Digital Trust opens in hole, trades marginally higher

By Evan Weinberger

New York, Feb. 1 - Microsoft Corp.'s unsolicited bid to take over Yahoo! Inc. sent the internet search engine's convertibles surging.

Digital Realty Trust Inc. priced its $300 million in cumulative perpetual convertible preferred stock cheap and at a discount. They traded a bit higher but closed under par.

Citigroup and Washington Mutual Inc. convertible preferreds continued to move higher as a plan to rescue at least one of the big bond insurers began to take shape, boosting confidence in the financials.

Wesco International Inc. slipped.

Powerwave Technologies Inc. moved higher ahead of earnings.

Sparked by Yahoo and to a lesser extent Digital Realty's new convertible senior notes, trading was active Friday morning. "Things were moving up," a sellside analyst said. The "market quieted down a little afternoon" as market participants "watched the tape go higher."

The tape moved higher in the afternoon as the glow of Microsoft's bid for Yahoo finally heated up stocks and as the talk of a bailout for bond insurers renewed market confidence. Trading throughout the day was volatile as the January jobs report told of the first contraction of jobs from the economy in four years.

In the end, the Dow Jones Industrial Average picked up 92.83 points, or 0.73%, to close at 12,743.19.

The Nasdaq gained 23.50 points, or 0.98%, for a 2,413.36 close.

And the Standard & Poor's 500 moved up 16.87 points, or 1.22%, to close at 1,395.42.

Investors say Yahoo! to deal

The financial world woke up Friday morning to news that Microsoft, rebuffed last year in friendly merger talks, had launched a $44.6 billion unsolicited takeover bid of Sunnyvale, Calif.-based Yahoo.

The deal valued Yahoo stock at $31 per share, a 62% premium over Thursday's close. The stock (Nasdaq: YHOO) closed Thursday at $19.18.

Yahoo said in a statement that it would study the deal, which is seen as Microsoft's attempt to compete with internet search giant Google.

Stock and convertible players jumped at the news. There were "a lot of Yahoo bonds trading," a trader said.

And Yahoo's zero-coupon convertible senior notes due April 1 were trading significantly higher.

One analyst said the play didn't make much sense. "It's always been money good," the analyst said. "No takeout protection, so there's really no place for it to go. In fact, people are probably going to lose money."

At best, the analyst said Yahoo convertible holders would break even. "With the stock up, it'll just go to parity. There's no upside to it," the analyst said.

But a second analyst said the Yahoo bet was a good one to make for convertible investors. "Yahoo's racked right off the bat," the second analyst said. "It doesn't matter they're going to mature in two months. People had a good day on that one."

Someone clearly did. The Yahoo convertibles, which were by far the most active issues on the day, closed Friday at 140.209 versus a closing stock price of $28.38. They closed Thursday at 104.695 versus a stock price of $19.18.

Yahoo stock surged forward $9.20, or 47.97%.

Digital Realty opens flat

Rumors abounded that San Francisco-based technology property real estate investment trust Digital Realty would bring its $300 million in convertible preferred stock to market at a discount Thursday night.

The company and its bookrunners, Citigroup and Credit Suisse, had already lowered the conversion premium talk to 17.5% to 19% from the originally announced 20% to 25%.

The deal was offered at a discount - $24.25 on a $25 liquidation preference preferred.

And the deal came in cheap, with a 5.5% dividend and 17.5% initial conversion premium. The dividend had been talked at 5% to 5.5%.

The preferreds carry a $45 million greenshoe.

The conversion price is $41.98, and the conversion ratio is 0.5955. The conversion ratio is capped at 0.6997.

The preferreds have call protection for the first five years. Beginning Feb. 6, 2013, they are callable subject to a 130% hurdle. There are no puts.

Digital Realty plans to use the proceeds to pay down its existing credit facility and for general corporate purposes.

As predicted by a fund manager Thursday, the deal was active early in the day and then petered out in the afternoon.

A sellside analyst said that Digital Realty's convertible preferred stock improved marginally throughout the day. "It priced in the hole and traded right around there," the analyst said, adding that REITs in general had been doing better Friday.

Digital Realty's 5.5% perpetual convertible preferred stock, series D, closed its first day of trading at 24.563 versus a closing stock price of $36.50.

Digital Realty's previously issued 4.375% perpetual cumulative convertible preferred stock closed Friday at 21.204 versus a stock price of $36.50. They closed Thursday at 21.11 versus a stock price of $35.76.

Digital Realty stock (NYSE: DLR) gained 74 cents, or 2.07%, on the day.

Increased confidence boosts financials

The improving tone around Wall Street has been helping financial convertibles, a sellside analyst said. "[Washington Mutual's] active, a little better," the analyst said. "Financials [are] better, Citigroup's a little better again."

Seattle-based Washington Mutual's 7.75% series R non-cumulative perpetual convertible preferred stock closed Friday at 1,230 versus a closing stock price of $21.82. They closed Thursday at 1,170 versus a stock price of $19.87.

Washington Mutual is the largest savings and loan in the United States. Its stock (NYSE: WM) jumped $1.95, or 9.81%, on the day.

New York-based Citigroup's 6.5% perpetual non-cumulative convertible preferred stock closed Friday at 55.98 versus a closing stock price of $29.69. The preferreds closed Thursday at 54.44 versus a stock price of $28.17.

Citigroup stock (NYSE: C) stretched $1.52, or 5.40%, to close the week strong.

Wesco slips

Pittsburgh-based electrical products and construction materials maker Wesco International slipped a bit Friday after strong gains on its fourth-quarter earnings Thursday.

Wesco's 1.75% convertible senior debentures due Nov. 1, 2026 closed Friday at 86.08 versus a closing stock price of $41.37. The debentures closed Thursday at 86.98 versus a stock price of $42.24.

Wesco's 2.625% convertible senior debentures due Oct. 15, 2025 closed Friday at 118.56 versus a stock price of $41.37 after finishing Thursday at 120.442 versus a stock price of $42.24.

Wesco stock (NYSE: WCC) fell 87 cents, or 2.06%, Friday.

Powerwave up ahead of earnings

Santa Ana, Calif.-based wireless communications components maker Powerwave Technologies isn't scheduled to announce its earnings until Monday after the market close.

A sellside analyst said that a lot of convertibles investors were eagerly waiting for a positive report. "People are hoping for good," the analyst said, "otherwise it won't be much fun."

It's unclear what the results will be, but two of Powerwave's three convertibles moved up to different degrees Friday.

Powerwave's 3.875% convertible subordinated notes due Oct. 1, 2027 closed Friday at 76.42 versus a closing stock price of $3.92. They closed Thursday at 74.6906 versus a stock price of $3.80.

The company's 1.875% convertible subordinated bonds due Nov. 15, 2024 closed Friday at 72.2147 versus a stock price of $3.92 after finishing Thursday at 71.1067 versus a stock price of $3.80.

And Powerwave's 1.25% convertible subordinated notes due July 15, 2008 were the downers on the day, closing Friday at 98.1304 versus a stock price of $3.92. They closed Thursday at 98.1782 versus a stock price of $3.80.

Powerwave stock (Nasdaq: PWAV) gained 12 cents, or 3.16%, on the day.

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