For Yahoo, it's deja vu all over again

Once again, rumors are circulating that Microsoft could be a buyer. Haven't we heard this a few times by now?

By Benzinga Oct 20, 2011 2:07PM

By Jonathan Chen, Benzinga Staff Writer


Yogi Berra is famous for his skill with the Yankees, as well as some of his "Yogisms" in which he says nonsensical things that have somehow made their way into pop culture. Now you can apply "Yogism" -- it's deja vu all over again -- to the world of finance.


Last night, a tweet from Wall Street Journal reporter Anupreeta Das said that Microsoft (MSFT) would help pay for a potential Yahoo (YHOO) takeover (Microsoft owns and publishes Top Stocks, an MSN Money site). In addition, private equity partner Silver Lake Partners and the Canadian Pension Plan Investment Board would help pay for the rest.


The value of the deal currently being discussed is between $16 and $18 per share, according to sources who spoke to the Wall Street Journal.


Earlier in October, a Reuters source said that Microsoft was considering placing a bid for Yahoo (YHOO), which Microsoft then went through pains to deny. Microsoft has already bid for Yahoo once, in 2008, and Yahoo turned it down. Now Steve Ballmer has a deal for Yahoo search. Ballmer has already said he has the best part of Yahoo, not including the Asian assets. So why would Microsoft kick in money to help take it private? According to the Journal, the Redmond, WA.-based company wants to maintain influence over the future of Yahoo.


Nothing is certain yet, and with Dan Loeb of Third Point as Yahoo's activist investor, it seems highly unlikely that a deal would go through for $16-$18 per share. Loeb has valued Yahoo around $27-$28 per share, and Microsoft had bid $33 per share back in 2008. To suggest a deal at $16-$18 per share, and then spinning out the Asian assets, does not seem likely. The potential tax implications of this suggest that a deal would be very hard, or almost impossible to make viable for all parties involved.

 

By now, the potential for Yahoo's collection of assets is known. Yahoo has some of the most visited properties on the web, including Yahoo News, Yahoo Finance and Yahoo Sports. It also has the 39% stake in Alibaba, and owns Yahoo! Japan, which are the apples of every investors eye. Loeb has estimated these stakes to be worth $3.10 and $5.24 per share, respectively. Alibaba's CEO, Jack Ma, has realized the importance of the stake in Alibaba, and has spoken about trying to buy Yahoo before.

 

It seems almost inevitable that a deal for Yahoo will happen by the end of the year, as the rumor mill continues to heat up, and more stories come out everyday. Those in Sunnyvale, Calif. must feel like they are in a time machine as old rumors become new rumors. It really is "deja vu all over again" for Yahoo.


ACTION ITEMS:

Bullish:
Traders who believe that Yahoo will get taken over for around $16-$18 per share might want to consider the following trades:

  • The common stock has limited upside if those levels are to be believed. Options may be a better bet for traders seeking to capture upside in Yahoo.
  • Dan Loeb owns over 5% of Yahoo, and has consistently said it is worth more than the $18 that it is currently being talked about. This could imply more upside for the common stock, and traders who believe Loeb will get his way may want to buy the common stock.

Bearish:
Traders who believe that Yahoo's board will make a mistake again may consider alternate positions:

  • If the partners do offer $18 per share, it could be rebuffed by Yahoo's board for a higher price. With tight economic times, a second bid may never come. As Loeb said, "No one wants to work with these clowns," referring to the board. 

Neither Benzinga nor its staff offer investment advice nor do they recommend that you buy, sell, or hold any security.


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