Monday, April 21, 2008

Mister Softee and Yahoo

Anyone take seriously the drivel that is reported as news? How about this AP headline:

"Yahoo's first-quarter earnings could sway Microsoft battle"
SAN FRANCISCO (AP) -- After two years of crumbling profits, Yahoo Inc. can't afford another letdown Tuesday when the Internet icon reports its first-quarter earnings.

Although they only cover a three-month period, the results could determine the Sunnyvale-based company's fate as it grapples with an unsolicited takeover offer from Microsoft Corp.

If Yahoo bounces back to exceed analysts' modest expectations, it could be a springboard to a higher bid from Microsoft or provide more credence to management's argument that the company will be better off remaining independent.

Last I looked, Microsoft (30.45) reports earnings on Thursday. The least painful way for MSFT to acquire Yahoo with their cash and stock bid is with a higher price stock price. It's not Yahoo's earnings that matter; it is MSFT. And they will beat handily.

Mister Softee already knows what their earnings are. And since MSFT is playing hardball with Yahoo, it means their earnings will exceed expectations.


Do the math. MSFT advertised their bid for Yahoo as $31:
Under our proposal, Microsoft would acquire all of the outstanding shares of Yahoo! common stock for per share consideration of $31 based on Microsoft’s closing share price on January 31, 2008, payable in the form of $31 in cash or 0.9509 of a share of Microsoft common stock.

The bid is half stock and half cash of $31. Where would MSFT stock have to go for a $33 a share bid? Since the conversion price of MSFT is .9509 per share, MSFT at 36.81 per share times the conversion factor (.9509)=35. Add in the 31 in cash for half of the stock and you have a $33 bid.

If you want a $31 number for the half cash and half stock bid, MSFT has to trade at $32.60. (32.60 x.9509=31).

So MSFT, at a minimum, will announce earnings, that will push the stock at least at least 2-4 points higher by Thursday in the after hours. Let's split the difference, and use the average of 36.81+32.60/2=34.70.

Which should be the high where Mr. Softee trades on this run.

The bears get bloodied, and Yahoo gets eaten by MSFT.

Tonight the bears will tell you that Texas Instruments guidance means something. Tomorrow it won't matter.

But if they want to go out and lay out some shorts, to be steamrolled again, let them. It's not their money; it's just their investors!

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