What is the Value of Yahoo?

Our chart of the Yahoo stock price for the past couple of years was provided by Yahoo. While the stock price on occasion has risen by $30 a share, its value has recently been less than $30 a share.

While Microsoft offered $44.6 billion for Yahoo or $31 a share, Yahoo’s board declined the offer with this story noting the following reason:

Yahoo’s board met over the weekend and concluded that the $44.6 billion offer from Microsoft “substantially undervalues” the company.

It does seem that the Microsoft offer included at least a modest acquisition premium. Back to Yahoo for another take on this story:

Many analysts expect Microsoft to raise its offer by $5 billion to $12 billion to entice Yahoo to sell. Yahoo is believed to want a bid of at least $56 billion, or about $40 per share. Microsoft’s first offer, which was made public Feb. 1, was originally valued at $31 per share. Microsoft also could take its bid directly to Yahoo shareholders. The decision could provoke a showdown between two of the world’s most prominent technology companies with Internet search leader Google Inc. looming in the background. Leery of Microsoft expanding its turf on the Internet, Google already has offered to help Yahoo avert a takeover and urged antitrust regulators to take a hard look at the proposed deal. If the world’s largest software maker wants Yahoo badly enough, Microsoft could try to override Yahoo’s board by taking its offer – originally valued at $31 per share – directly to the shareholders. Pursuing that risky route probably will require Microsoft to attempt to oust Yahoo’s current 10-member board. Alternatively, Microsoft could sweeten its bid. Many analysts believe Microsoft is prepared to offer as much as $35 per share for Yahoo, which still boasts one of the Internet’s largest audiences and most powerful advertising vehicles despite a prolonged slump that has hammered its stock. Yahoo’s board reached the decision after exploring a wide variety of alternatives during the past week, according to the person who spoke to The Associated Press. The person didn’t want to be identified because the reasons for Yahoo’s rebuff won’t be officially spelled out until Monday morning. Microsoft and Yahoo declined to comment Saturday on the decision, first reported by The Wall Street Journal on its Web site. Yahoo’s board concluded Microsoft’s offer is inadequate even though the company couldn’t find any other potential bidders willing to offer a higher price. Without other suitors on the horizon, Yahoo has had little choice but to turn a cold shoulder toward Microsoft if the board hopes to fulfill its responsibility to fetch the highest price possible for the company, said technology investment banker Ken Marlin.

If Yahoo had already shopped its companies to other strategic buyers and the best offer they received was from Microsoft, I’m not quite sure what the board is thinking. Winning through Merger and Acquisition has a nice discussion of how the players in some auction market would view alternative offers. Yahoo’s reservation price would be its fair market value as a standalone company. Yahoo likely had several potential buyers who looked also looked at the synergies their companies might enjoy if merged with Yahoo. Maybe the value of Yahoo to Microsoft might indeed be between $35 and $40 a share but if no other company is willing to bid more than $31 a share, why would Microsoft bid any more for Yahoo? When Ken Marlin says “Yahoo has had little choice but to turn a cold shoulder toward Microsoft” if there are no other suitors for Yahoo, this makes no sense. I would not be surprised if the shareholders did make a deal with Microsoft even over the objections of the Yahoo board.

Update: Barry Ritholtz provides more background on the attempts to purchase Yahoo including:

The rumors of this now pre-empted private bid include the following: to be announced as early as February 5th; negotiated price was in the $23-25 range; some Yahoo! properties to be spun out to shareholders.

To makes an apples to apples comparison of the $31 a share Microsoft offer and the $25 a share offer from the private equity firm, one would have to know what these properties that would be spun out to the shareholders were worth. But assuming this value was less than $6 a share, the Microsoft offer still looks tempting to Yahoo shareholders.