[tlrobinson]

The stock market continues to baffle me.

Microsoft is offering $31 per share of Yahoo. YHOO is now trading at nearly $31, up from $19 at the close yesterday.

Why would anyone pay $31 for a share of Yahoo right now? There are two possible outcomes: 1) the deal goes through, and you get your $31 back either in Microsoft stock or cash. No net gain. 2) The deal doesn't go through and YHOO drops back to around $19, losing you about 30%.

Am I missing something?

[jorgeortiz85]

Yes. Microsoft was down 4% on the announcement.

It's merger arbitrage.

Buy YHOO, short MSFT. If the merger doesn't go through, then sure, your YHOO stock will drop, but your MSFT stock will gain.

If you get the right proportion of long/short YHOO/MSFT, you make money no matter what happens.

(Where the "right proportion" is really complicated to figure out, and is often wrong.)

[mhb]

You're missing a third outcome where Yahoo shareholders effectively haggle over the price and Microsoft offers $40.

[anewaccountname]

When you hear "Microsoft makes a surprise, unsolicited offer to buy Yahoo!", that means there hasn't been any negotiation yet, and that this is the minimum offer (they can accept it right now; the only downside is the risk that they don't pass the reg approval process). Now, you gave two possible outcomes, but as others have mentioned there is a third: a counter offer for more money.

(yet another outcome is that Yahoo twiddles it's thumbs and Microsoft rescinds the offer, but in that case you can look forward to getting in on a nice shareholder class-action lawsuit against the board)

[dean]

This always happens with buyout offers, the buyee's stock price shoots up close to the amount of the buyout offer, but never reaches it. It generally stops a couple dollars short of the buyout price. At this moment, Yahoo is trading at $28.25, still low enough to make a sure-thing couple of bucks per share. It's a gamble though. If the deal falls through, or gets blocked by the government, the buyee's stock price drops back down to where it was before the offer .

[anewaccountname]

>This always happens with buyout offers

Everyone thinks they know so much more than the market. In this thread so far I have seen you claim the stock always goes (slightly) lower than the offer, and another guy express puzzlement as to why YHOO even managed to exceed the offer at times today. I hope neither of you were trading BEA Oracle offered ~6 billion, BEA rejected it, and 3 months later Oracle offered ~8billion and BEA accepted. One other thing to keep in mind (this is more picking on the other guy than on you) is that when these deals are announced they are often largely made up of stock (Microsoft is so buried in cash that might not be the case here). If Yahoo! accepted the offer right now, it still might end up with a different future value. Luckily it is not to hard to factor that out by purchasing various positions or leveraged vehicles in or relating to Microsoft/whoever-the-aquirer-may-be.

[dean]

I was not trading BEA when Oracle made the bid to buy them out. Why? What happened to BEA's stock price during these two offers? Did it not move at all? Did it go beyond the offer price? Somewhere in between?

[Xichekolas]

Or lower. Dashed hopes can be (temporarily) worse than no hope to begin with.

[whacked_new]

The speculation and exuberance.

This rumor is over a year old; it was also first floated around Q1 last year and YHOO's stock price surged that time too. I seriously thought Yahoo was going to sell that time but they didn't. Perhaps this time is different?

[ojbyrne]

Before it was a rumor. This time there's an actual official looking document outlining the offer on MS's website. I think that qualifies as "different."

[carpo]

There's also the possibility another company will outbid the original offer.

[Xichekolas]

While technically possible, you'd be hard pressed to find many companies that could put up that kind of money, even fewer actually in the industry (no Wal-mart doesn't count), and even fewer that could pull off the financing in today's debt market.

Microsoft is sorta uniquely positioned to make this offer at this moment.