A successful hostile takeover from the perspective of the bidder is a rare occurrence. Generally speaking, hostile deals are frowned upon by not only some shareholders on both sides of a deal but also by the bankers that sometimes provide the financing. The synergies are also highly scrutinized as history has not been kind to these types of deals. But this case may be different...
As we all know, Microsoft placed a $44.6 billion bet that buying Yahoo can give it the Internet presence that it has longed for in recent years. After years of testing and research, Microsoft's foray into online search and advertising can be summarized in one word: FAILED! With Balmer at the helm, he is determined to change that here and now. The software giant's surprising, unsolicited offer for Yahoo represents a 60% premium over the Internet company's recent share price. If the deal goes on to close, this would be the biggest tech transaction ever recorded.
With so many details and questions surrounding this deal and the use of a "hostile" strategy, I have decided to tackle this deal from a Q&A standpoint....
What is a hostile takeover and why is Microsoft forcing a hostile takeover on Yahoo?
Normally, when a bidder makes an offer for another company, it usually informs the board of the target beforehand. If the target board feels that the offer is such that the shareholders will be best served by accepting, it will then recommend the offer be accepted by the shareholders. This is commonly referred to as a "friendly" takeover. A hostile situation is complete different. In the case of hostile takeover normally one of the two (if not both) following conditions will exist between the respective parties: (1) the board rejects the offer, but the bidder continues to aggressively pursue it, and/or (2) a bidder goes public to make an offer without informing the board prior to such offer.
In the case of Microsoft and Yahoo, I would say both conditions, to some extent, exist. In 2006, Microsoft began showing interest in a Yahoo deal. But after some initial discussions, Yahoo pushed Microsoft away. Yahoo figured that they could go "Lone Ranger" by way of strategic partnerships and internal growth initiatives. Well that failed miserably. In recent years, Yahoo has suffered from disappointing online-ad sales, declining web-search market share and high management turnover.
With Yahoo turning its back to Microsoft, that basically meant that the desktop giant had no choice but to take the deal public and make a hostile bid for it. And, in all fairness, to Microsoft, its a smart move knowing that they themselves are in a "must win" situation.
Is it possible that other potential buyers could enter the fray at this point?
Possible but very unlikely. I am not sure that there is anyone, at least among those who might be interested in making a play on Yahoo, that has the kind of financial firepower and war chest of cash that Microsoft has on hand. And in this world of high powered private equity firms, the turmoil of the credit markets make it unlikely that any consortium of dealmakers could ban together to pick up Yahoo.
So at this point I don't see any white knights entering into a bidding war with the Goliath of desktop software.
I heard of a tactic that Yahoo may use which involves enacting a "poison pill"...what is it and how does it apply in this case?
The "poison pill" is a takeover defense used by target firms and can take many forms as it applies to defense. The most common poison pill is known as a shareholder rights plan.
In a shareholder rights plan, the target company issues rights to existing shareholders to acquire a large number of new securities, usually common stock or preferred stock, at a discount to the current market price. The new rights typically allow holders (other than a bidder) to convert their right into a large number of common shares if anyone acquires more than a set amount of the target's stock (typically 10-20%). This dilutes the percentage of the target owned by the bidder, and makes it more expensive to acquire control of the target. Many times the dilution can kill pending deals.
In the case of Yahoo, the firm does have a shareholder rights plan in place which could make the deal expensive. However, the timing of the deal suggests the Microsoft (aka "Softie) might be looking to take its case to shareholders via a proxy fight for Yahoo board seats. If Softie wins seats on the board then they could in effect have the new board members drop the provisions of the poison pill and let Softie close the deal without a shot fired.
What are the odds that this deal is consummated?
Tough to put numbers on it but if I were forced to do so, I would say about 75% chance it gets done. Microsoft can make a great case and has the war chest to put together a hefty deal. And Yahoo, on the other hand, has very little leverage in light of the poor financial results and forecasts that they have provided shareholders in recent quarters. So, with that, I say that a deal is definitely "more likely than not."
Should I buy Yahoo stock on the premise that Microsoft will probably up the target price at some point?
Absolutely not! This is a risky transaction that has many hurdles and potential pitfalls (proxy vote, antitrust problems, white knight scenario, etc.) that could kill the deal and send Yahoo's stock tumbling into a complete free fall. It could easily lose 30-40% in minutes if news broke that the deal is off while the upside at this point is pretty much capped.
If anything, you might be able to look at the weakness in Softie's share price as an opportunity to initiate a position.
How important is this deal to Microsoft?
This deal is real important to Microsoft. While I hate to cast a superlative on Microsoft, I will say that Microsoft's long term survival is very dependent on their Internet success or lack thereof. And up to this point, Microsoft has struggled mightily to establish a foothold in the search and online ad market. With that said, it's a must do deal for Balmer and Co.
This Q&A is to be continued, please stay tuned...
- Stocks rebounded slightly today based on better than expected results from Disney. Disney posted a 26 percent decline in profit late Tuesday, but the results beat expectations. The company reported a 9 percent rise in revenue due in large part to increasing revenues from ESPN, "High School Musical" and "Hannah Montana."
