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Monday, February 11, 2008

I love you not

Its been very interesting to watch the Yahoo-Microsoft soap opera. Last month, Microsoft had offered to buy Yahoo for about $44.5 billion which at that time meant that it was paying $31/share for Yahoo. Prior to the buyout news, Yahoo was trading around $19/share, so Microsoft's offer of $31/share meant it was paying about 62% premium for Yahoo. After almost 10 days of "carefully studying" Microsoft's offer, Yahoo has rejected Microsoft's offer saying it "substantially undervalues" Yahoo!

Am not sure in what world Yahoo's board members have been living when they rejected Microsoft's offer! I had bought some shares of Yahoo in the mid-30s and ever since have been seeing it go down because of Yahoo's disappointing earnings quarter after quarter. Their new Panama platform for search still seems to be ineffective in competing with Google and the company doesn't appear to know how to turn itself around. So I was glad to see Microsoft offer to buy out Yahoo.

So far, Microsoft seems to be standing by it's original offer. Yahoo, for its part, doesn't seem to have much leverage in dictating the terms of buyout. Since the buyout news, various hedge funds and other investment firms have bid up the price of Yahoo's share to almost $30 as of Monday, in order to take advantage of the arbitrage opportunity, considering that Microsoft's offer is for $31/share. These investors will only be too eager to have Microsoft buy their shares. Yahoo for its part is expected to face several lawsuits from shareholders who are growing increasingly impatient of Yahoo's turnaround, and don't think that Yahoo's executives are acting in shareholders' best interests.

Am not sure how this buyout will play out. Based on what I have read, some analysts say that Microsoft is likely to increase the offer by a slight amount to around $35 although it won't pay $40/share that Yahoo is expecting. Others are saying that Microsoft is in no hurry and with Yahoo having no leverage, Microsoft can play the waiting game like Oracle's Larry Elison did when BEA Systems rejected its' initial $17/share offer, asking instead for $21/share (Oracle ultimately upped it offer slightly and bought BEA Systems for about $19/share). They expect the buyout to happen, with Microsoft buying Yahoo in low $30s/share. Still others are saying that Microsoft will go hostile and will launch proxy fight. However, many people do say that if the buyout drags out or doesn't pan out, Yahoo's share could drop back to its pre-buyout price in teens.

While Yahoo and Microsoft play out this "Days of Our Lives" soap opera, I decided to take advantage of the recent run up in Yahoo's share and sold a $35 Jan 2010 covered call option yesterday on my Yahoo's share and got $1.45/share. So if Microsoft does increase its offer or if Yahoo's share do rise for any other reason to $35 or above by Jan 2010, I will get $35/share for Yahoo. Including $1.45/share premium I got, that's like selling Yahoo for $36.45/share - a price at which I don't mind selling Yahoo although I will miss out on any rise in Yahoo's share above $35. Of course, if Yahoo's share stay below $35/share, I get to keep $145 I got for the contract. For my remaining few shares, I set up a stop loss order at $28 just in case the buyout doesn't happen and Yahoo's shares tank substantially. Since its just a stop loss order, am not sure if I will get $28/share, especially if Yahoo's shares drop quickly and sharply but hopefully, I will be able to get something in the $25-$28 range - which for me personally would still be better than the Yahoo's pre-offer price in teens. Until then of course, I will just sit back and watch this soap opera.

For related articles, see:

Barron's: Microsoft: Yahoo’s Response To Offer Is “Unfortunate;” Warns It Could Take Other Steps; No New Bid

The Wall Street Journal: Microsoft Stands by Yahoo Bid

As always, a final disclaimer: I am not a financial expert, and the purpose of my writings or this web site is not to give any financial advice nor make any recommendations. This site is just a blog of my activities, interests and thoughts. Trading options and stocks can be very risky, so you need to exercise your judgment and seek competent advice before investing in such instruments.

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posted by Ruby @ 10:10 PM

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