This evening, Microsoft withdrew its bid for Yahoo. According to CNN, Microsoft had offered as much as $33 per share ($49.6 billion) for Yahoo. Yahoo had been look for up to an additional $4-$5 billion. In my opinion, this is a good move for Microsoft.

Sometimes--actually quite often in the field of mergers and acquisitions--the best deal is that which is never made. The academic literature suggests that 70%-80% of acquisitions fail to create shareholder wealth. Some prominent disasters included the marriages between AOL and TimeWarner and Citigroup and Travelers, Inc.

In a quick and dirty exercise for illustrative purposes only, if one glanced at the financial statements of Microsoft and Yahoo, it appeared that even the $49.6 billion deal would have posed a risk of eliminating Microsoft's economic profits (assuming a cost of capital toward the higher end of a 10%-15% range, figures that are among those that have been publicly cited and are probably reasonable given that Microsoft's capital structure consists of all stock and no long-term debt).

Had the merger taken place, the combined earnings of the new enterprise would have amounted to approximately $14.725 billion. The invested capital of the combined company would have come to approximately $113 billion ($63.4 billion in Microsoft's common stock + $49.6 billion in the acquisition price). If one assumes a 10% cost of capital, the cost of capital would have come to $11.3 billion. At a 15% cost of capital, the cost of capital would have come to approximately $16.95 billion. If one added another $4 billion to the acquisition price, the cost of capital would have ranged between $11.7 billion and $17.55 billion. All said, especially if Microsoft's cost of capital were at the higher end of the range, the acquisition might well have eroded shareholder wealth rather than enhanced it, especially if Microsoft had agreed to Yahoo's desired terms.

Needless to say, a much more rigorous examination was undertaken by Microsoft and its investment bankers. However, I suspect that the numbers from the quick and dirty glimpse are in the proverbial ballpark. After all, Microsoft CEO Steve Ballmer walked away, noting that Yahoo seemed interested in an additional $4 billion-$5 billion for consenting to the acquisition, explaining, "After careful consideration, we believe the economics demanded by Yahoo do not make sense for us."

Nevertheless, sometimes deals have been left for dead only to revive again. It will be interesting to see if this proposed acquisition comes back to life at some point.

Originally Posted by donsutherland1 This evening, Microsoft withdrew its bid for Yahoo. According to CNN, Microsoft had offered as much as $33 per share ($49.6 billion) for Yahoo. Yahoo had been look for up to an additional $4-$5 billion. In my opinion, this is a good move for Microsoft. Sometimes--actually quite often in the field of mergers and acquisitions--the best deal is that which is never made. The academic literature suggests that 70%-80% of acquisitions fail to create shareholder wealth. Some prominent disasters included the marriages between AOL and TimeWarner and Citigroup and Travelers, Inc. In a quick and dirty exercise for illustrative purposes only, if one glanced at the financial statements of Microsoft and Yahoo, it appeared that even the $49.6 billion deal would have posed a risk of eliminating Microsoft's economic profits (assuming a cost of capital toward the higher end of a 10%-15% range, figures that are among those that have been publicly cited and are probably reasonable given that Microsoft's capital structure consists of all stock and no long-term debt). Had the merger taken place, the combined earnings of the new enterprise would have amounted to approximately $14.725 billion. The invested capital of the combined company would have come to approximately $113 billion ($63.4 billion in Microsoft's common stock + $49.6 billion in the acquisition price). If one assumes a 10% cost of capital, the cost of capital would have come to $11.3 billion. At a 15% cost of capital, the cost of capital would have come to approximately $16.95 billion. If one added another $4 billion to the acquisition price, the cost of capital would have ranged between $11.7 billion and $17.55 billion. All said, especially if Microsoft's cost of capital were at the higher end of the range, the acquisition might well have eroded shareholder wealth rather than enhanced it, especially if Microsoft had agreed to Yahoo's desired terms. Needless to say, a much more rigorous examination was undertaken by Microsoft and its investment bankers. However, I suspect that the numbers from the quick and dirty glimpse are in the proverbial ballpark. After all, Microsoft CEO Steve Ballmer walked away, noting that Yahoo seemed interested in an additional $4 billion-$5 billion for consenting to the acquisition, explaining, "After careful consideration, we believe the economics demanded by Yahoo do not make sense for us." Nevertheless, sometimes deals have been left for dead only to revive again. It will be interesting to see if this proposed acquisition comes back to life at some point.

Unfortunately, such studies and references to such studies can be found in such places a Harvard Business Review, Knowledge@Wharton, etc., not to mention Harvard Business School's case studies, but not online.

Originally Posted by new coup for you I would love to know where all these people are that are supposedly using Yahoo.

In the wake of Microsoft's terminating its bid to acquire Yahoo, Monday's trading in the respective companies' shares should be quite intense. Microsoft could close above $30 per share (vs. $29.24 at Friday's close)--probably in the $31-$34 range (where its shares had generally been trading in the 30 days leading up to to its initial bid for Yahoo)--as that company's shareholders hail a decision that ended a proposed acquisition that might well have had the potential of eroding shareholder wealth. Yahoo's shares will likely sink and a close in the $22.50 to $25.50 range (vs. $28.67 at Friday's close), somewhat above where its shares had generally been trading in the 30 days leading up to to Microsoft's initial bid for Yahoo. There is even a chance that the company's shares could briefly reach or drop below $20 per share in intraday trading before the price firms up, as markets can go to excess in their reactions.

Farther down the road, it will be interesting to see what moves each company makes in its bid to strengthen its online advertising business via what would essentially amount to the acquisition of another company's customer portfolio. AOL (decent customer base) is one possible target. Myspace.com (attractive, younger customer base) is another. My guess is that Microsoft recognizes that internal growth alone will not put it into a relatively stronger position in the near- or medium-term with respect to Google than its current standing. Hence, Microsoft will continue to look to make a strategic acquisition to bolster its capacity to attract online advertising.

Should Microsoft and Yahoo seek to engage in a bidding war against one another for, let's say AOL or Myspace.com, Microsoft would have the far stronger hand in terms of liquid assets/cashflow. Yahoo would likely need to undertake a leveraged bid and, given the ongoing credit squeeze, its ability to raise financing for such a deal would not be assured. In the most recent quarterly balance sheet, Microsoft's cash & cash equivalents + short-term investments amounted to $26.3 billion; Yahoo's came to about $2.0 billion. Moreover, during the most quarter, Microsoft's cash flow from operations amounted to $7.1 billion vs. Yahoo's $0.6 billion.

Yahoo could seek to deepen its recent collaboration in advertising with Google and/or explore the possibility of stock buybacks so as to mitigate pressures on its shares. Given Microsoft's overwhelming edge in liquid assets, greater collaboration with Google appears to be a more likely option for Yahoo than an acquisition, particularly one in which Microsoft might be a competing bidder.

Finally, it should again be noted that sometimes deals that have been left for dead have revived again. It will be interesting to see if this proposed acquisition comes back to life at some point. A sharp fall in Yahoo's stock along with a proliferation of shareholder lawsuits could well push Yahoo's Board of Directors to attempt to reopen negotiations with Microsoft. If so, Microsoft's leverage will be much greater than it was in the initial discussions, so Microsoft might not have to bid much more than its initial offer. Given the somewhat poisoned relationship between the two companies and concern of a talent flight from Yahoo, I do not believe a revival of the Microsoft bid is likely in the near-term.

In trading in Frankfurt, Yahoo's shares were trading sharply lower while Microsoft's were modestly higher. In addition, some notable analysts were suggesting that the Microsoft bid for Yahoo could be revived at some point. Bloomberg.com reported:

UBS AG's Heather Bellini, the top-ranked software analyst by Institutional Investor magazine, has said that Microsoft could come back and buy Yahoo later on if it walked away this time. Microsoft may approach Yahoo again in three to six months, said Robert Breza, an RBC Capital Markets analyst in Minneapolis.

Oracle Corp., the third-biggest software maker, initially abandoned its bid for BEA Systems Inc. after BEA asked for 24 percent more than Oracle's $17-a-share bid. The two companies agreed to the buyout three months later at $19.38 a share.

Bloomberg.com also reported that Laura Martin, an analyst at Soleil Securities Corp estimated that Yahoo's stock would drop $8 per share in today's trading. Friday's close was $28.67. In my opinion, given market expectations that an embattled Yahoo CEO Jerry Yang will be under considerable shareholder pressure, which could push him to accept a deal on less attractive terms than Microsoft's offer and/or take steps to protect shareholder value via stock buybacks/structural changes in Yahoo's business e.g., the sale of part of its business, I don't believe things will be quite that bad for Yahoo. Intra-day trading might take Yahoo down to near or just below $20 per share, but prices will probably firm up before the close.