Legg Mason's star portfolio manager Bill Miller thinks that Microsoft (MSFT – $28.34) needs to raise its price in order to acquire Yahoo! (YHOO – $29.57). At $29.57, Yahoo is trading like Microsoft will up its price (remember, Yahoo deserves a big discount to the deal price because of how long the deal is expected to take to close).
It's a bad risk reward to bet on this.
Yahoo has roughly 1.4 billion shares outstanding. That means that every extra dollar Microsoft raises its bid costs Microsoft an extra 1.4 billion dollars (this doesn't include executive options that trigger in a hostile buyout). So even if Microsoft spends $200 million on advertising, shareholder lobbying and proxy filings for a lengthy proxy battle to fire the board, that is nothing compared to the $4.2 billion an extra three dollars would cost them. As a shareholder of both companies and a recent buyer of some additional Microsoft, I'd rather see Microsoft spend on the proxy fight. I think shareholders big and small will pressure management and the Yahoo board to give in early. The alternative is seeing the stock go back to $20.
I mentioned this information tonight during my first live TV appearance on The Fox Business Network Show Happy Hour. Fox Business News' Happy Hour is an edgy and fresh financial show that takes place in the Bull and Bear Bar at the Waldorf Astoria Hotel. Appropriately, the show takes place in a bar that I used to frequent during my days in the early 90's as a young, arrogant and sophomoric emergering markets bond trader. I came back today nervous to be on TV, humbled by life and much happier. What appears in the above link are my responses to questions from long haired hip host Cody Willard.
Trading Disclosures: I own Yahoo and I am short 25, 30 and 35 strike calls against about half my position. I sold 1/4 of my Yahoo position near the close last night and bought it back near today's open for a .14 profit. I own Microsoft (MSFT) and added to my position today.
Wired Disclosures: I like Yahoo! For years, MyYahoo.com has been my browser startup page. I pay to use Yahoo enhanced email. I have over 3000 photos on flickr. For equities, I find Yahoo Finance to be almost as good as Bloomberg, but without the $1800 a month price tag. I have even been using Yahoo's search recently and find it so greatly improved that I don't need Google as much. I have registered websites using Yahoo.
Arrogant Bond Trader David Neubert From 1991 Never Would Have Made This Disclosure: I am shamelessly kissing butt to get back on a Financial TV program that takes place in a bar.
Shareholder Activism Disclosure: I have pledged my shares to Eric Jackson's small guy revolt to reform Yahoo's board. As of this writing, he's up to 2.1 million shares.