Though it has been overshadowed by the high drama at Bear Stearns, the saga at Yahoo and its would-be acquirer, Microsoft, is still getting close attention. In recent weeks, Yahoo’s shares have drifted lower, suggesting that investors are becoming more pessimistic about the likelihood of Microsoft raising its bid. But Mark Mahaney, an analyst at Citigroup, thinks the pessimism may be overdone.
Mr. Mahaney raised his rating on Yahoo’s stock to “buy” from “hold” on Monday. Why? For one thing, he argues that Yahoo is the only viable way for Microsoft to jump-start its Internet strategy. This likely makes Yahoo too important to risk losing over a few dollars per share.
He suggests that Microsoft could raise its Yahoo bid to $34 per share, which he calls a “reasonable, valuation-supported base case.”
When Microsoft originally announced its Yahoo bid on Feb. 1, it was valued at $31 in cash and Microsoft stock. Yahoo rejected that bid as too low, and since then, Microsoft’s shares have declined, lowering the value of its bid as well.
To seal the deal, some analysts have said that Microsoft will at least need to sweeten the bid so it gets back to the original $31 per share.
Yahoo’s stock closed Monday at $27.52, about 11 percent below the original $31 bid and 6 percent below the bid’s current value. It was 23 percent below Mr. Mahaney’s theoretical $34 take-out price.
But where is Yahoo’s negotiating leverage? Yahoo’s talks with potential “white knights” don’t seem to have progressed very far, although some observers still hold out hope for some kind of partnership or asset swap with Time Warner, which owns AOL.
In his research report, Mr. Mahaney said the possibility of such a deal could have a “forcing function” on Microsoft’s bid.
Separately, Yahoo recently laid out its plans for staying independent, which included projections that its operating cash flow would double in three years. But some analysts called the estimates too optimistic.
