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60% Chance Microsoft Walks From Yahoo Deal (MSFT / YHOO) [Silicon Alley Insider]

read moreYHOOMSFTHenry BlodgetThu, 24 Apr 2008 20:04:00 -0500

We now think it's more likely than not that Microsoft (MSFT) will withdraw its offer for Yahoo (YHOO) next week. This will likely send Yahoo's stock into the low $20s and Microsoft's up.

Here's why:

Microsoft's squishy quarter makes it less likely that Microsoft's rising stock will raise the value of Microsoft's bid on its own. (Ironically, of course, as the deal becomes less likely, Microsoft's stock will rise because of that--but we assume Yahoo is smart enough to know what would happen if it suddenly agreed to a deal.)

Yahoo has dug itself in deep enough that we don't see the company caving and agreeing to sell at this price--especially in the next two days. Jerry has demonstrated that he's not easily spooked, and he has to have been prepared for the possibility that Microsoft would walk. In fact, we think Jerry would see this as a victory (which it would be) even if many Yahoo shareholders do not.

We think lots of Microsoft shareholders and Microsoft employees hate this deal--as well they should, because it would be a disaster. We think the complaints and concerns about the deal expressed to Steve Ballmer over the past two months have probably made him think twice about the wisdom of fighting to the death for Yahoo, even if he'll never admit that. At the very least, they'll make it easier to walk way.

We think it will actually be harder for Microsoft to win a proxy fight at the current price that is commonly thought: At least 35% of Yahoo's stock is in the hands of folks who appear unwilling to sell without a price increase (Capital Group, Legg Mason, Jerry, David, and other insiders). If Microsoft is actually willing to raise its price, it should do so now--before launching a Pyrrhic battle that will last, at a minimum, 3-4 months, will distract and hurt both companies, and might fail.

Microsoft's public statements have now gone beyond threats to what appears to us to be acceptance and resignation. Maybe we're just falling for a negotiating tactic, but we don't think so. If Microsoft is going to seriously consider raising its bid next week--which, based on Yahoo's behavior, we think is now the only way to get this deal done quickly--it sure isn't acting like it. Cutting the price, meanwhile, would make it even harder for Microsoft to win a proxy battle.

Eight weeks ago, we thought this was pretty much a done deal. We thought the companies would find common ground around $35 and that an agreement would be reached relatively rapidly at that price, once Yahoo exhausted all its options. Now, based on the positions taken by both companies and the first quarter results, we think there's less than a 50% chance the deal will get done. At least in this go-round.

Disclosure: Henry Blodget has long-term positions in both MSFT and YHOO.

After The Term Sheet [Ask The VC]

read moreGreat Postsbrad@feld.comThu, 24 Apr 2008 19:24:38 -0500

Bill Burnham has today's best VC blog of the day titled 4 Things to Do After You Get Your First Term Sheet. As a special bonus, the second best VC blog of the day is Fred Wilson's post titled From Messes To Successes. Fred had a post in him titled "From Moths to Butterflies" but he liked the ring of the esses better.

Microsoft FQ3 Mixed, Walking From Yahoo Deal More Likely [Silicon Alley Insider]

read moreHenry BlodgetThu, 24 Apr 2008 16:39:00 -0500

Picture 37.png Summary: Quarter was mixed--not the blockbuster Wall Street was looking for. FQ3 revenue was slightly below consensus (surprising). Operating income and EPS were strong (after factoring out impact of EU fine and a reduction in the tax rate). June revenue outlook okay, but EPS guidance is below current consensus. FY2009 guidance fine--above consensus for both revenue and EPS. Not surprisingly, stock is down.

Impact on Yahoo deal: This will make it more difficult for Microsoft to complete the deal. In recent days, the bid value had climbed almost all the way back to $31. Now it will be down again. If Microsoft wants to raise its offer, it will have to offer more shares or cash. Yahoo has now dug itself in deep. Not surprising, therefore, that Microsoft appears to be laying the groundwork to walk away.

Revenue of $14.45 billion is slightly short of consensus. This is disappointing.

EPS strong: $0.47, above guidance, consensus, and whispers due to stronger than expected operating income (EU fine and tax benefit canceled each other out). This is good, but won't likely neutralize concerns about revenue.

Free Cash Flow: Actually down year over year on lower cash from operations (lower deferred revenue) and higher capital expenditures. Lower deferred revenue also not good news.

Outlook: June revenue guidance is fine--range of $15.5-$15.8 billion, modestly above consensus of $15.6 billion. June EPS guidance, however, is below the current consensus: $0.45-$0.48, versus the current consensus of $0.48.

2009 Guidance: FY2009 revenue guidance is good--range of $66.9-$68.0 billion, above current consensus of $66.5 billion. 2009 EPS guidance is very good: $2.13-$2.19, above consensus of $2.10.

Segments: Only division that exceeded consensus was Entertainment and Devices (which is essentially irrelevant). Windows and Office both lagged.

Model updated (please see link below).

CONFERENCE CALL NOTES (Listen via link below)

Interminable preamble...

Chris Liddell:

EDD drove results [unfortunately].

Macro economy: Obviously not immune, but we're not seeing it. We remain confident.

Colleen: "Normalized" revenue growth 14% after adjusting for guaranteeing

PC units expectations moderated by couple of points since January in some regions.

Contracted not billed up sequentially.

Client revenue down 2% after adjusting for tech guarantees.

OEM units up 5%, 4 points slower than PC market. Three reasons:
- Last year OEMs rebuilt inventory (tough comp)
- Inventory levels higher than normal entering quarter
- Increase in shipments of unlicensed PCs, esp. in Asia.
PCs up 13%
OEM revenue up 1%, after adjustment.
- Increasing volume emerging markets
- Offset by premium mix.
Commercial and retail down 13% after adjusting. Growth would have been up 20

Server and Tools

Revenue up 23rd quarter in a row
Unearned revs up 35%+ vs last year
Launched three big products

Online Services Business

Online up 29% ex Aquantive (impressive)
Search queries and pageviews up y/y.

EDD

XBOX still outselling PS3.
Bought Danger.

[Jonathan Kennedy taking over our call coverage. Thanks for reading! --HB]

Online Services to grow 37% to 41% in 4th quarter
EDD to grow 32% to 34%

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