Microsoft Playing Hardball

Posted by Bull Bear Trader | 4/04/2008 10:14:00 PM | , | 2 comments »

Microsoft is evaluating its bid given that Yahoo! has lost value since Microsoft made its offering price. The lost value has not only been in share price, but also in lost personnel. Of course, what share value has been lost is to date only the value Microsoft injected into the market when it proposed a takeover for $31 per share.

As mentioned on Fast Money this evening on CNBC, Microsoft is taking the Oracle approach: 1.) make a hostile bid, 2.) wait for no other bidders to show up, 3.) apply pressure, 4.) threaten a lower bid, 5.) or even threaten to possibility walk away and simply buy the stock cheaper at a later date.

Jerry Yang is in a difficult position since his company is losing value everyday (lower share price and lower share of the market). While Yahoo! and its founders may hate to be taken over by Microsoft, shareholders will have a legitimate complaint if Microsoft gets frustrated and walks away, which will cause the stock to drop back into the teens. While Yahoo! may be delaying things in order to further examine their options, they are likely to find that they really don't have any, and are just left with a lower bid and frustrated shareholders. The chances of another company bidding against Microsoft are remote.

In the mean time, some traders have been writing $31 and higher calls against the Yahoo! stock that they already own. This allows them to generate income while they wait, and provide some additional downside cushion. The move seems safer everyday given that Microsoft seems less likely to substantially raise its bid (and if it does, they still get to sell their shares for $31). Of course, as with any covered call position, there is always the risk that the covered position will lose value. Such downside may be up to Jerry Yang, more than Mr. Softie, or the market.

Tickers: MSFT, YHOO

2 comments

  1. lynch.cr // April 5, 2008 at 6:35 PM

    If Microsoft was to get to the point of walking away, would Yahoo shareholders have enough of a legal case to successfully sue Yahoo for not acting for their, the shareholders, best interests? This assumes that the Yahoo's stock price would return to the trading levels before Microsoft stepped in, and that Yahoo was doing anything to gain market share or "get back on track."

  2. Bull Bear Trader // April 5, 2008 at 8:52 PM

    Whether any lawsuits are successful is difficult to tell since we don't really know if Yahoo! is negotiating in good faith (other than what we hear and read in the news). Of course, that is not going to stop the lawsuits if Yahoo! rejects the bid without putting the offer up to a shareholder vote. Back in February there were already articles mentioning that at least seven such suits had already been filed. I imagine the number has increased since then. As for the overall success of such lawsuits in general, that is also difficult to tell since many are settled out of court, but I don't have (and am currently not able to find) any hard data.