Microsoft's threats to go hostile and lower its bid for Yahoo! are counterproductive, ICAP analyst says

By Paul A. Harris

St. Louis, April 9 - Microsoft Corp. would be making a mistake to go hostile in its bid for Yahoo!, Inc., according to Sachin Shah, special situations analyst for ICAP Securities. Microsoft CEO Steven Ballmer threatened to do just that in a Saturday email to Yahoo!

In the email, Ballmer stated: "If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo! board.

"The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal."

Shah noted that Bill Miller, portfolio manager for Legg Mason, which holds a 7% stake in Yahoo!, told the Wall Street Journal that Legg Mason is willing to support Yahoo!'s effort to remain independent should Microsoft lower its bid.

Miller also said that Microsoft's three-week deadline is counterproductive.

Shah believes that a hostile scenario has the potential to erode the share prices of both companies, and to create regulatory headwinds not only in the United States, but in Europe, Japan and China, which already tend to regard Microsoft warily.

Make it cash

Shah believes that Yahoo! is correct in asserting that Microsoft's $31 per share, half cash, half stock offer is too low.

ICAP's target price is $37, with $32.50 of stand alone valuation and $4.50 in synergies that will be realized in the acquisition.

Also, the analyst adds, the conversion value of Microsoft's offer is now well below $31 per share because Microsoft's stock is lower now than it was when it made the bid for Yahoo!

"The implied conversion, because Microsoft shares have come down off a $32.60 level, is $29.25 approximately," said Shah.

"We believe that Yahoo! shareholders should request an a all-cash offer."

"Microsoft is asserting that it is offering stock so that Yahoo! shareholders can realize the upside of the potential synergies.

"I would disagree."

For example, do Yahoo! shareholders want to own Microsoft, with that company's products, including the Vista operating system, under price pressure? Also the online alternative Google Docs, with some of the same features as Microsoft Office, has become available.

An all-cash offer higher than $31 would benefit all parties, Shah asserted.

First of all, he said, an all-cash offer would prevent the dilution of Microsoft shares.

"There is also some arbitrage where people are shorting Microsoft because they're playing the spread," Shah added, pointing to the $29.25 conversion value versus the $31 bid.

"That's creating some negative bias.

"If there was an all-cash offer people would have to cover those shorts."

Not about a quarter

Shah notes that there has been a tendency among analysts to point to April 22, when Yahoo! reports earnings, as a make-or-break event.

In this scenario, should Yahoo! miss earnings Microsoft would have plenty of ammunition to lower its bid.

"If it came down to one quarter Microsoft would have walked away a long time ago," the analyst said.

"We believe Microsoft really needs Yahoo!

If Yahoo! doesn't make the quarter it shouldn't mean that much to Microsoft or any potential acquirer, because the opportunities are going to be realized further into the future.

"Online advertising and mobile advertising are the future.

"That's one of the main reasons Microsoft is so interested in acquiring the company."

Ultimately, the analyst said, Steven Ballmer could do a lot of good for both companies, as well as for the prospects for the merger deal - both among shareholders and regulators - if he actually spelled out some of Microsoft's strategy in making the play for Yahoo!.

"If instead of lowballing he were to openly discuss the potential synergies that will come into play in a merger with Yahoo!, Microsoft's share price could potentially go higher," Shah said.

"Microsoft's share price would seem unlikely to benefit from a proxy fight. For one thing some of Microsoft's shareholders own Yahoo! shares as well."

Flight time

A Wall Street Journal report that there could be an announcement on the merger of Delta Air Lines, Inc. and Northwest Airlines Corp. as early as next week, if Delta is successful in discussions with its pilots, failed to improve the share prices in those two companies on Wednesday.

Never mind the merger, sources told Prospect News.

Delta and Northwest, and all the other airlines, have come under pressure as a result of skyrocketing fuel prices. The price of a barrel of crude oil hit $112 during intraday trading, according to one analyst who covers the airlines sector.

Delta (NYSE: DAL) shares lost 4.6%, or $0.43, to close at $8.91, on Wednesday.

Northwest (NYSE: NWA) dropped by 5.02%, or $0.51, to close at $9.65.

A special situations equities analyst noted that Delta is reported to have been meeting with its pilots' union in order to hammer out a compensation agreement, which would pressure Northwest Airlines pilots' to do the same.

Meanwhile an airlines equities analyst who spoke to Prospect News on Thursday afternoon imparted something of a mathematical formula for tracking the Delta-Northwest merger: "The higher oil prices go the more likely the merger will take place," the source said.

"With or without the pilots."

Elsewhere in the airlines sector, AMR Corp. (NYSE: AMR) fell 11.14%, or $1.15, to close at $9.17.

Continental Airlines, Inc. (NYSE: CAL) gave up 7.58%, closing at $20.24 per share, $1.66 lower.

UAL Corp. (Nasdaq: UAUA) lost 6.91%, or $1.57, to close at $21.16.

Alaska Air Group, Inc. (NYSE: ALK) closed 5.02% lower at $19.69, down $1.04.

Southwest Airlines Co. (NYSE: LUV) eased by 1.34%, or $0.17 per share, to close at $12.50.

All three major U.S. indexes posted losses on Wednesday.

The Nasdaq gave up the most, 1.13%, to close at 2,322.12, down 26.64.

The S&P 500, meanwhile, gave up 0.81%, or 11.05 points, to close at 1,354.49.

The Dow was off 0.39%, or 49.18 points, closing the day at 12,527.26.

EP soars on sale to St. Jude

St. Jude Medical, Inc. announced that it will acquire EP MedSystems, Inc., a maker of cardiac rhythm management and electrophysiology products, for approximately $92.1 million.

EP MedSystems shareholders will receive $3.00 per share, cash or stock.

In connection with the transaction, St. Jude said its board has approved an additional stock buyback authorization of $50 million, which increases St. Jude Medical's share repurchase authorization to $300 million from $250 million. The additional buyback authorization will be used to offset the shares issued in the acquisition.

The deal is expected to close during the third quarter of 2008.

"This transaction will accelerate the growth of St. Jude Medical's program to help physicians cure atrial fibrillation," said Daniel J. Starks, chairman, president and chief executive officer of St. Jude Medical, in a Wednesday press release.

The news sent EP MedSystems (Nasdaq: EPMD) shares soaring 102.84%. The shares gained $1.45 to close at $2.86.

St. Jude Medical (NYSE: STJ) fell 1.39%, or $0.62, to close at $44.11 per share.

© 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.