The Odds on Microhoo

Microsoft's bid for Yahoo gives bettors plenty of opportunity to get in on the action

Feb. 15, 2008

By Jason Brough
Bodog Nation Contributing Writer

It's been a tumultuous year for one of the Internet's most famous companies. Today, Yahoo is once again under siege, this time by arguably the most famous technology company of them all: Microsoft.

Back in the summer, it was Yahoo's investors – upset at the company's failures to keep up with Google in the online advertising game – that were making most of the noise. On June 18, with the stock trading below $30 and shareholder dissent bubbling over, CEO Terry Semel offered his resignation and turned over the reins to co-founder Jerry Yang.

But changes at the top, along with plans to lay off employees, didn't impress Wall Street. By the end of January, Yahoo stock was trading below $20.

That's when Microsoft, itself desperate to compete with Google, decided to pounce. On Feb. 1, Microsoft made an unsolicited bid of $44.6 billion, or $31 per share, for Yahoo.

"Our proposal represents a 62% premium above the closing price of Yahoo! common stock of $19.18 on January 31, 2008," Microsoft CEO Steven Ballmer wrote in a letter to Yahoo’s board. "Microsoft's consistent belief has been that the combination of Microsoft and Yahoo! clearly represents the best way to deliver maximum value to our respective shareholders, as well as create a more efficient and competitive company that would provide greater value and service to our customers."

Yahoo CEO Jerry Yang has failed to turn the company he founded around. (AP Images)

Desperate to recoup at least some of their losses, many Yahoo investors clamored for a deal to be struck. However, the company that started out in 1994 as a humble web site named "Jerry's Guide to the World Wide Web" wouldn't sell out so easily.

On Feb. 11, Yahoo formally rejected Microsoft’s bid and made the following statement: "After careful evaluation, the Board believes that Microsoft's proposal substantially undervalues Yahoo! including our global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as our substantial unconsolidated investments."

So What Now?

On Thursday, Yahoo was trading in and around $30 – around 10 bucks more than two weeks ago – so investors obviously don’t expect the merger talk to go away anytime soon. The question is, with whom will Yahoo align? After all, Microsoft isn't the only giant sniffing around.

The name that's generating the most buzz is Rupert Murdoch. More specifically, his company, News Corp.

"The idea floating about is that News Corp would take a stake in Yahoo of about 20 per cent, allowing MySpace and Yahoo to work together somehow," the Financial Times reported on Thursday.

Oddsmakers, for their part, aren't so sure about that and have responded by setting odds of +300 that News Corp will acquire Yahoo by the summer. It's more likely, according to the Bodog Sportsbook, that Microsoft will sweeten the pot for Yang and the gang.

Rupert Murdoch might play a role in Yahoo's future. (AP Images)

To the question, "Will Microsoft offer to buy out Yahoo at $40 or more per share?" oddsmakers have set a line of +200 for "Yes" and -300 for "No."

Will a deal get done between the two companies, regardless of price? Bodog sees it happening at odds of +150.

What the Experts Are Saying

"We view Yahoo's board rejection of the Microsoft offer as a first step in a long drawn out process at the end of which Microsoft will prevail."
- Youssef Squali, analyst, Jefferies & Co.

"It is hard to see a scenario that could create as much value for shareholders as quickly as a Microsoft offer."
- Mark Mahaney, analyst, Citigroup

"A News Corp. deal would do nothing to solve Yahoo's decline in search market share. It would allow Yahoo to create a larger display advertising property, but Yahoo already has more than enough of that inventory. I'm having a hard time understanding why this deal would happen."
- Kevin Lee, executive chairman, Didit

"We think this deal is a strategic imperative for MSFT, and that YHOO is in a tough spot if it wishes to remain independent. It has been reported that MSFT has been discussing a combination with YHOO for well over a year, and that it had been prepared to pay over $40 per share previously…YHOO is a uniquely valuable asset, and we expect MSFT will do what it takes to acquire it."
- Bill Miller, fund manager, Legg Mason

One More Deal to Discuss

It might not be as flashy as a potential Microhoo, but that doesn't mean you can't bet on whether the New York Times will sell its online information portal, About.com.

On Jan. 29, Silicon Alley Insider reported that the site that covers everything from religion to romance to recipes was on the block. Almost immediately, however, NYT denied the rumor.

Oddsmakers see the deal as unlikely, with odds of +300 that About.com will get spun off by the summer.

TOP PHOTO: They probably won't call it Microhoo, but it works for now.