Filed under: Deals, Google (GOOG), Microsoft (MSFT), Yahoo! (YHOO), Stocks to Buy
The soap opera known as Microsoft (NASDAQ: MSFT) and Yahoo! (NASDAQ: YHOO) looks like it is going to continue as Yahoo!’s board of directors rejects Microsoft’s $44.6 billion bid. This is part of the game that investment bankers affectionately call “posturing”. There are no other bidders for Yahoo! currently, but Microsoft desperately wants Yahoo!. Actually, Microsoft desperately needs Yahoo!.
So, what in the heck is going on here? Yahoo! shares fell to $19.18 after it reported disappointing numbers for the December 2007 quarter and forward guidance was ugly. Yahoo! has been struggling for a few years as Google (NASDAQ: GOOG) has been eating its and all other competitors’ lunch.
I spent 16 years in the investment banking world and when it came to valuing IPO’s, mergers and / or acquisitions, the very first question all parties involved would ask is “what are the comparables?” If company A wants to offer its IPO, we valued the IPO based on current public values of competitors, including price-earnings ratio, price-to-book value, price-to-sales, operating margins vs. industry comps, etc. Picture yourself looking to buy a home. The first thing you look at is the square footage comparison, neighborhood and other vital pieces of information of homes sold in your price range. It’s the comps. Same in the investing world.
So, why would Microsoft offer a price that is 67 times Yahoo!’s 2008 consensus earnings per share estimate for 2008? Consensus is for 2008 earnings per share of 46 cents. No one pays a 67 P/E ratio, especially for a company that has posted 5 straight declining quarters.Right? Wrong.
Google has blazed the trail in the search engine and on-line advertising/marketing sector. Google owns a market share of 76% and it’s a growing sector to boot. Get that important point down because it’s critical to Microsoft’s thinking: Google is TAKING MARKET SHARE IN A GROWING MARKET. That’s a double whammy. According to industry scorekeeper comScore, Yahoo!’s market share is 15%, and Microsoft’s at 3.9%, for a combined 19%, still one quarter the size of Google.
The sector is still posting growth rates of 40-45%, and international is even stronger. Microsoft knows it must act quickly and decisively if it intends to be any kind of player. Yahoo! also knows it and will act stubbornly, basically posturing for a better price than the $31 per share offer.
Microsoft realizes the sector is so profitable and so vast and IT WILL pay up for Yahoo!. if it has too. Heck, applying the same 67 multiple as a comp to Google’s consensus 2008 estimate of $20.15 per share, Microsoft clearly is stating that Google is worth $1,350 per share.
Sound far fetched? Just ask Microsoft and its investment bankers…I don’t think so…Just ask the management team of Microsoft’s recent acquisition aQuantive…It is actively pushing and encouraging Microsoft’s senior management team to go hard after Yahoo!.
Think Google has some upside from here??? Just ask Microsoft…
Georges Yared writes about great growth stocks today in GameOn Investing
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