Microsoft to Rescue the Yahoo Damsel in Distress

Yahoo!’s vulnerable situation was bound to bring out acquisition offers, and Microsoft has been sniffing at the company for a year (see the letter from Ballmer to Yang in the WSJ). I was hoping against hope that Private Equity would step up to the plate, recognizing the leverage opportunity, but it has not happened.

Now, Microsoft’s rather sweet offer will have to be considered by the Yahoo! Board. The $44.6 billion offer represents a 62% premium above the closing price of Yahoo! common stock on Jan. 31, 2008. Yesterday’s closing price was $19.18. Microsoft’s offer is $31. Right now, the stock is trading at $27.80 amidst heavy trading volume of almost 290 Million shares having changed hands. Shareholders are breathing a sigh of relief.

Unless other comparable offers turn up, Yahoo! will have to sell itself to Microsoft. I am not optimistic that other offers will materialize, despite rampant speculation about who else may be in a position to bid. And I don’t believe Private Equity players would match Microsoft’s offer.

So, for all practical purposes, we have to prepare for a time when Yahoo! will be sitting inside Microsoft. It is the sad end of an era, for sure. It is also a sad ending for a company of Yahoo!’s stature.

On the positive side, the Microsoft-Yahoo! combo could be a good force against Google’s domination if the DNA mismatch can be handled. I have some skepticism on this, because Microsoft’s geeky DNA is not what Yahoo! needs to clean itself up. As I have said like a broken record, Yahoo!’s opportunity is one of verticalization. Somehow, I have my doubts about how Microsoft will play its Yahoo! hand, once they manage to get a hold of it.

Anyway, I have to say, I feel sad for Yahoo!