I like what blogger Thomas Hawk says about what will happen to Yahoo (YHOO) if they ignore Steve Ballmer’s exploding offer to buy the company from the board.
In fact, if Microsoft really wanted to play hard ball at this point they could simply give Yahoo 48 hours to accept the terms or pull the offer off of the table. With the offer off of the table Yahoo stock would immediately drop. The lawsuits would take place driving the stock down further and if Microsoft just waited 6 months or so they might be able to end up buying the stock in the end for somewhere around $8 a share.
EIGHT DOLLARS A SHARE???
There’s a chance that he just might be right, but my more likely downside target is failed Microsoft (MSFT – $29.16). That’s why weeks ago I sold ALL my Yahoo shares and replaced them with 30 strike calls.
So what would I do now? I’m not ready to buy back any YHOO at this point. The stock is $28.36. My upside is around 10%. My downside? I think the stock will go to around 20 so I’m looking at 45% downside vs 10% upside. Unless I think there is a more than 80% chance of this deal going through or that a higher bid will come through, buying Yahoo at $28-29.00 right now is a bad bet.
If the shares drop to $20 and Microsoft goes hostile, as it seems they might according to the letter, I’d buy YHOO around $20.00 and tender my shares to Mr. Softy.
What will I do if Yahoo hits 30 on the Monday open? I’ll sell half my calls.
Disclosure: I own Microsoft (MSFT) and am short 31 strike calls against 1/4 of my position. I recently sold all my Yahoo (YHOO) common and bought 30 strike calls. I am a fan of Yahoo products: I like their search, email, deli.cio.us, small business services and am addicted to flickr. Yahoo has managed to extract money from me on an annual basis for what I consider valuable services.