And the winner is... Google
Microsoft-Yahoo stalemate does neither any good
What's the message when your stock tumbles 15 percent in a single day?
That kind of setback usually means some seriously bad news has come out of a company, but in the case of Yahoo Inc. it's, well, hard to say what's really going on.
Yahoo shares fell hard yesterday, down $4.20 to $24.47 in reaction to the weekend news that Microsoft Corp.'s $33 per share offer to buy the company was dead in the water. A bad day, for sure. But many people had expected a much more severe sell-off.
Meanwhile, Microsoft shares more or less broke even yesterday and finished the day down 16 cents to $29.08. Call that a wash.
One widely held opinion of yesterday's stock price movements: It isn't really over yet. Many investors believe Microsoft chief executive Steve Ballmer was simply negotiating when he packed up his $47.5 billion takeover offer and went home Saturday. For all of Microsoft's issues, Yahoo is really up against it now and will have to call Ballmer back to the table. So some think.
The stock price activity yesterday was "indicative of people thinking the deal might go through," says Peter Falvey, a managing director at Revolution Partners, a Boston firm that advises clients in technology mergers, including two companies sold to Microsoft.
"There's got to be pressure on Yahoo to go back and negotiate with Microsoft," Falvey says. "I think there's a real chance of that happening."
Or maybe not. Other analysts think investors betting on an eventual deal between Microsoft and Yahoo will be disappointed.
"Both companies are trading on this belief they are going to get together again," says analyst Rob Enderle of the Enderle Group in San Jose, Calif. "Once people realize that's not going to happen, there's going to be a lot of downside risk."
This is no casual debate at Boston's biggest mutual fund companies that own millions of shares of each company. Fidelity Investments, State Street Corp., and Wellington Management, among others, have big stakes in Microsoft and, to a lesser degree, Yahoo.
But Boston fund companies have even more money riding on Google Inc., the clear winner to date in the drama between Microsoft and Yahoo. Fidelity alone owns nearly 9 percent of Google, a stake worth more than $16 billion. Wellington and State Street are also among Google's largest shareholders.
As Microsoft and Yahoo struggled with each other in recent weeks, Google has only seen its shares climb higher. The stock advanced another $13.61 to $594.90 per share yesterday.
Of course, Google is the company Yahoo and Microsoft are both chasing. Microsoft is certainly wrestling with serious longer-term strategic problems and an ever-growing threat from Google. But Yahoo has real-time, five-alarm issues that demand immediate attention.
Yahoo chief executive Jerry Yang managed to fend off Microsoft, for the moment, by insisting his company was worth at least $37 per share. Now he has to come up with a credible story to explain how Yahoo might get to that kind of stock price in the foreseeable future.
In truth, no one outside Yahoo thinks the company is worth $37 per share. I'd bet even Yang doesn't believe that. But it's pretty hard to spin a convincing story to explain how Yahoo is actually worth $33 per share, the price Ballmer was prepared to pay. In fact, I'm not so sure the stock is really worth $24, its current price range.
Yahoo delivered operating earnings of about $700 million last year, roughly the same amount recorded in 2004. Those operating earnings have been declining for the past two years. The company's profit numbers include a lot of depreciation and amortization so cash earnings are better, forecast to reach about 97 cents per share this year. But they still don't come close to justifying a value of $37 per share for a slow-growing Yahoo.
"There are a very small number of places they can go, and they've sort of hit the wall earningswise," says Jim Kaplan, president of Cubic Asset Management in Boston. "I don't see any way they're going to manage their way out of the box on their own."
Yang's options include a partnership with Google on search advertising that would draw serious government scrutiny and may do as much to hurt Yahoo's value as help it. Time Warner Inc. is desperate to marry off its AOL unit with somebody else, but that kind of arrangement wouldn't solve Yahoo's real problems either.
Or Yang could swallow hard and call Ballmer back. Culturally, that's hard to imagine. No one at Yahoo really wants it to go that way. But Yang can't say no to Microsoft's money without a believable Plan B. A lot of investors were betting their stock market money yesterday on a last-minute reconciliation.
Steven Syre is a Globe columnist. He can be reached at syre@globe.com.
rising
falling 