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Microsoft Pri0

Welcome to Microsoft Pri0: That's Microspeak for top priority, and that's the news and observations you'll find here from Seattle Times technology reporter Matt Day.

May 5, 2008 at 6:08 AM

Yahoo shares begin 20 percent lower; some analysts suspect Microsoft come-back bid

In heavy pre-market trading, Yahoo shares fell, as expected, about 20 percent to $23.04 on heavy volume as investors sold off the stock in response to Microsoft withdrawing its acquisition offer.

Microsoft, meanwhile, gained 2.3 percent in the morning session, settling at $29.92 before the opening bell. Today’s story looks at where the company goes next in its competition in online services and advertising.

Analysts chiming in on the collapse of the deal this weekend see a strong likelihood that Microsoft could be back.

David Hilal, analyst with Friedman Billings Ramsey, sees Microsoft “essentially playing the role of the white knight,” he told investors in a note:

“Despite the withdrawal of the offer, we are not convinced that MSFT is going away for good. We continue to believe that an acquisition of YHOO is very strategic to MSFT. In our view, taking away its bid is likely a public negotiating tactic from MSFT that is designed to incite YHOO shareholders to pressure its board to ratchet their expectations down (similar to the tactic ORCL used in its pursuit of BEAS). We think that MSFT is essentially telling YHOO shareholders that they could have gotten $33 per share if not for the unrealistic demands of their board. Should the frustration of YHOO shareholders come to a boil, we believe MSFT could reenter the picture, essentially playing the role of the white knight.”

Sarah Friar, analyst with Goldman Sachs, is reinstating her “buy” rating on Microsoft’s stock, with a target price of $38 a share. Her note to investors this morning focused less on Microsoft returning to bid for Yahoo.

“We don’t believe that’s Microsoft’s decision to drop its offer precludes a deal being consummated, however it does suggest that Microsoft will be at least somewhat price disciplined — a positive for sentiment for the stock.”

Citi Investment Research analyst Brent Thill agrees that in the near-term, Microsoft’s stock should benefit from the shift in attention back to Microsoft’s other businesses, but long-term, online services is still a weak spot for the company. His note to investors was titled, “MSFT: Moving to Plan C; Don’t Rule Out YHOO Acq. Down the Road”:

“While MSFT’s move is a win for its shareholders in the near-term as investor attention will revert back to a strong enterprise product cycle opportunity, key to MSFT’s stock long-term is a steadily improving Online business (~6-7% of total rev) and margin structure – YHOO would have accelerated profitability for MSFT’s heavily unprofitable Internet business ($1bn loss in last yr). Considering there are no public alternatives to YHOO, we still believe there is a chance that both MSFT and YHOO can reconcile their differences on price and join forces (15% probability).”

Sid Parakh, of McAdams Wright Ragen, said Microsoft has some leeway to spend more in its online services business, but he, too, sees future discussions with Yahoo as likely. From his note this morning:

“Microsoft may be able to justify added investments in the Online business without much opposition from shareholders after having stopped short of investing ~$50 billion for Yahoo!. … It is still likely that Microsoft may reengage in discussions with Yahoo!, either if Yahoo! shareholders pressure Yahoo! management to do so, or if both companies mutually see the need for such a combination at a future point in time.”

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