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Ballmer Doth Protest Too Much, Methinks

By Glenn Curtis

Tickers in this Article: GOOG, MSFT, YHOO

Internet giant Yahoo (Nasdaq:YHOO) has been in a world of pain since it turned down acquisition advances from rival Microsoft (Nasdaq:MSFT). Shares sunk like a stone and are now trading near their 52-week low, and earnings have been abysmal.

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Yahoo shareholders clung to the hope that the Microsoft deal was not truly dead. Speculation heated up when news broke that Yahoo CEO Jerry Yang would be stepping aside. But just when the rumor party was getting into full swing, Microsoft chief executive Steve Ballmer shut it down by stating during the annual meeting: "Let me be as clear as I think I've tried to be publicly. We are done with all discussions with Yahoo."

Plain and simple, the merger is dead, right? Well, perhaps not. I'd like to delve into why I think a combination could still come to fruition.

The Deal That Almost Was
Earlier in the year Microsoft bid more than $44 billion in cash and stock for Yahoo, which came out to $31 per share - a more than 50% premium. At the time CNN quoted Ballmer as saying: "We are very, very confident this is the right path for Microsoft and for Yahoo."

Many thought that a combination was a sure thing. Combining two companies of this size could create synergies, and potentially put Google (Nasdaq:GOOG) on the defensive. The deal never materialized, however. Investors learned that Microsoft was perhaps willing to go as high as $33 a share, but Yahoo was holding out for more; $37 per share was the reputed asking price.

A deal was never reached, and rightly or wrongly, many shareholders blamed Yang for the collapse of the deal. So, when I learned Yang would be hitting the bricks I expected that Microsoft would entertain another go around.

Ballmer's comments surprised me, but here's why I think that talks could still happen in spite of his apparent comment.

Four Reasons Why The Deal's Not Dead
I know Ballmer said acquisition talks are dead, but when there is money to be made, Wall Street has a funny way of resurrecting the past. Let's look at why the deal could be revisited.

Yahoo's stock has taken a pummeling, and this could spur acquisition talk at some point. Shareholders will likely give the new chief executive (whoever he or she may be) a bit of time to work things out, but if the stock remains in the doldrums, talks are a distinct possibility.
Carl Icahn is on the Yahoo board. I suspect that Icahn is not at all pleased with the share price. According to Yahoo Finance, Icahn Capital Management owned more than 50 million shares as of June 30. That gives Icahn room to flex his muscles in the board room to force another sit down with Ballmer and crew. His influence should not be overlooked. (To learn more about Icahn, read Can You Invest Like Carl Icahn?.)
Microsoft is trading near its 52-week low, and it could use a catalyst to get its own stock moving. A combination would be a plus for Microsoft, especially if the two parties could generate massive cost savings. I think Microsoft could bid $20 per share and Yahoo shareholder would go for it at this point.
Finally, while Ballmer dismissed the idea of an acquisition, Yahoo still has a well known brand. It obviously has a huge presence on the web and is expected to generate more than $5 billion in revenue this and next year according to data located on Yahoo Finance.

Bottom Line
Microsoft's Ballmer has publicly nixed the idea of picking up Yahoo. But despite his apparent rejection, speculation of a merger simply will not die. There are several reasons why a deal makes sense right now, and sooner or later I suspect talks will heat up again.

To learn more, read Mergers And Acquisitions: Why They Can Fail.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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