[bp001]

"Massively Undervalues" huh...

Let's see, a stock price of under $20/share previous to the $31/share offer being made. A greater than 50% premium is massively undervaluing the company?

Granted the market is not a perfect indicator of true value of a company. Google was a good example of this when they were valued at around $100/share and then proceeded to quadruple in value over the next 2 years.

However, Yahoo is no Google. They have not been able to effectively compete. I'm surprised Microsoft was willing to offer such a premium for Yahoo in the first place. Maybe I underestimate the synergies of the two companies and/or Microsoft's concern about their online division.

The interesting question to me is what comes next...Does Microsoft: A. Sweeten the offer B. Walk away completely C. Give it a year expecting Yahoo's price to drop significantly before making a subsequent offer?

Unless the Yahoo boardmembers have some plan up their sleeves, I expect some very unhappy shareholders should B or C pan out.

[dkokelley]

"Massively undervalues" is a way of Yahoo saying "We think our share price should be higher than A: what it is, and B: what you're offering."

Yahoo is undoubtedly going through a rough time in terms of their share price, but what's being forgotten is past performance. Since the beginning of 2007 Yahoo's share price has averaged around $25 or so, with a low of $22.73 and a high of $33.63. The pre-bid low this year was $19.05, and was probably due to the fact that the majority of the industry was taking a beating, along with the rest of the economy.

When companies offer takeovers, they usually pay a premium in share price, however Microsoft took advantage of the state of the economy by offering a takeover at a particularly low point in share price, allowing them to offer an artificial premium that was - when compared to YHOO average share price - at only a $5 premium, or 20%.

[bp001]

Average share price over the last year is meaningless. Yes, the economy in general was taking a beating, but Yahoo had also come out with disappointing earning and outlook. At any given time, the market does a pretty good job at pricing in all factors to a stock's price.

If the economy as a whole is having problems and a company is at risk of lower earnings, the stock is clearly worth less. Over the longer term, if a company is able to get over those hurdles and achieve the earnings they desire, their value will again rise.

Would you argue that if a company tried to buy Citibank at $40/share that they were trying to take advantage of things? Its current price is $26/share but it was above $45 for the majority of the year. Citi, similar to Yahoo has had significant difficulties that reflect on the potential future earnings of the company. Therefore, these companies are likely fairly valued.

As a result, the Yahoo line that they are "massively undervalued" rings false to me. They have turned down a tremendous premium over their value...Unless they have other courses of action to raise their earnings significantly or they have other offers. My best guess is they are just negotiating and trying to get Microsoft to offer a few more $/share.

[dkokelley]

It's just the business cycle. The economy at whole is having problems and the company is at risk of lower earnings, as you said. This is temporary. The economy will recover, and Yahoo is probably expecting their stock to rise again to closer to their average. Yahoo is probably telling Microsoft that the premium they are offering does not reflect their true value, but an artificially low value instead. Come back later when our stock rebounds with the rest of the economy.

I'm saying that Yahoo is currently down right now, and understandably so, but that it is set to rise with the rest of the economy and Yahoo wants Microsoft to reflect that in their offer.

I believe that there is validity in the claim "massively undervalued" though the term "massively" is subject to different interpretations.

[michaelneale]

Robert X Cringely had some interesting theories. Mostly it was about MS wanting to turn itself into a "General Electric" over time, rather then compete head on with google.

[drusenko]

maybe the market was accurately valuing Google, though? of all the startups out there, how many deliver on a Google scale?

[bp001]

That is true, not many companies can deliver on a Google scale, and there was a good amount of risk that Google wouldn't have been able to deliver.

Maybe the risks that Google would not have been able to deliver on the scale that they have warrants a return of 400% over two years. However, I tend to believe that the market didn't perfectly understand Google's technology/market placing/placing/potential/strength of executive team/etc and low-balled the upside potential.