We’re all getting a bit sick of this continued Microsoft-Yahoo takeover bid dispute, with Yahoo running around trying to avoid the hostile bid while Microsoft loses more market cap. by the second. After seeing many bloggers try to talk about this, unsuccessfully, without much of an idea of what is actually happening, I feel like it’s high time the Net Fool steps in to let you know what the deal is really about ;)

All of this mess started January 31st, when Microsoft announced a bid for Yahoo at $31 a share… a huge premium versus Yahoo’s then $19/share price. Of course, this triggered a sell off of Microsoft (NYSE: MSFT) and a feeding frenzy on Yahoo (NYSE: YHOO) as most mergers typically do. But Yahoo formally rejected this bid, saying that the $31 dollars per share “undervalues” their company. Is this true? I don’t think so! But Yahoo doesn’t seem to care.

Fast forward to today, Yahoo still doesn’t know what it is doing. Everyone should realize by now that the news you hear about “oh Yahoo is trying to team up with AOL and News Corp” or “wow, Yahoo is going to team up with Google to fight Microsoft” is all a load of crap. All they are doing is stalling, Microsoft controls them and everything that they do. I know it would seem to most that this takeover is basically the clash of two titans, but its not. It’s Microsoft, a larger company by FAR, playing the “coiled python” and waiting to move in for the kill. It’s Steve Ballmer, CEO of Microsoft, throwing a tantrum as he realizes that Yahoo is effectively destroying Microsoft’s shareholder value while we wait in limbo for the deal to go through.

Now that we’ve waited so long, there is a lot more to consider. It is looking as though the $31 per share was the correct price, and if we could turn back time now I think the deal goes through. The two-faced problem? GOOGLE! Since January 31st when the deal was announced, shares of Google have dropped off the charts losing about 15% of their value. This not only makes Yahoo’s complaint that $31/share was too little all the weaker, it makes the chances that Ballmer will want to increase their bid to $38-$41 per share weaker! Truth be told, I think that the reason Microsoft wants Yahoo is not to strengthen their business model, but to slow down Google. Yahoo somewhat realizes this, and they don’t want to become a pawn in the Microsoft-Google war. But will they even be able to resist much longer… and is it worth it?

On Microsoft’s side of the coin, we now have three worst-case scenarios:

  1. Microsoft walks away from the deal
    Here, Microsoft’s shares take a hit, but then again… they don’t need to waste cash on Yahoo so they are the best off in this case
  2. Microsoft acquires Yahoo
    It’s about time. But Microsoft’s share value plummets further because now they are spending a lot of their cash flow on an unsuccessful business
  3. The stalling continues…
    Microsoft continues to deteriorate slowly, while Yahoo sits in the balance thinking up more reasons they are worth more then they are

Nice, eh? Shareholders are fed up and getting more and more frustrated by the minute.

The Net Fool’s Prediction: Microsoft eventually increases their bid to about $35. This is less than the originally proposed counter-offer, but appropriate as Yahoo’s peers have fallen off the map over the past month. Our friend Steve Ballmer has a power problem, and losing this bid is not an option to a tech powerhouse that wants to control anything and everything. Once acquired, rather than trying to assimilate them into their business model, Microsoft launches an attack on Google. We’re talking lower online advertisement costs, search engine incentives, basically anything to slow Google… using Yahoo as a loss leader to gain market share. Will this work? Who know.. but increased competition could definitely benefit bloggers :D

-The Net Fool

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