Well it looks like Yahoo rejected the deal. Here is what the board said.

Quoting sources familiar with the situation, the Journal reports that Yahoo’s board feels the offer of $31 per share “massively undervalues” the company. A letter spelling out the position is expected to be sent Monday. Yahoo also expressed concern that Microsoft’s offer does not account for risks to Yahoo should the deal be overturned by regulators.

The Journal source said the company would be unwilling to consider an offer below $40 per share, which would represent a $12 billion increase over Microsoft’s original $44.6 billion bid. It is unclear if Microsoft would be willing to increase its bid by such a significant amount.

So I thought, ok let’s look at the numbers and see what they say from a valuation perspective.

Microsoft offered 31 USD per share.


The price would imply a past PE of 65.96, and a forward PE of 72.94. What needs to be understood that the earnings of Yahoo has been going down since 2005 and 2008 is not an up year. From a raw valuation perspective it would seem Microsoft is overpaying, but Microsoft is actually being fair.

The historical PE for Yahoo is around 67, which in my opinion is completely overvalued since Yahoo is anything but a growth company. For Yahoo to be a growth company your earnings need to be growing. With Microsoft willing to pay 31 USD per share it indicates a completely fair price based on historical PE. And that should tell you Microsoft does not want to short change Yahoo even though it could be argued that Yahoo is overvalued.

So what does Yahoo say in reply? They want a share price of at least 40 implying they want a PE of at least 90. GIVE ME A FREAKEN BREAK! Yahoo is being greedy. Many think that Microsoft might be willing to go as high as 35, which is still overpriced, but being more than fair.

Without knowing yet the full details my initial impression is arrogance. To say that Microsoft is “undervaluing” Yahoo is a farce. While many believe that Yahoo still has some of the largest audience let me remind you of a company called AOL, and CompuServe. Some of you will know about AOL, and I am guessing most of you will not know about CompuServe. Both of these companies were “huge” companies in their heyday. Now they are nothing. This could just as easily and is happening to Yahoo. While today I use maps.yahoo.com I am also using www.map24.com. Yahoo should remember that.

So what will happen next? I really don’t know because Microsoft has not spoken. Though I wonder if the shareholders will accept this? I know if I was a Yahoo shareholder I would be fuming. I would be thinking, WTF! Interestingly in my research note on the deal I recommended that you buy an April Put. Up to this point it is was a wild card hedge. Now I wonder if I might be able to profit handsomely.