Novice Investing - Microsoft Don't Yahoo

Date: Friday 05th 2008f September 2008 05:37:30 PM

Microsoft Don't Yahoo - 09/05/2006

By: Hari Wibowo

I came across an interesting article regarding the possibility of Microsoft acquiring Yahoo! to 'breathe life into Microsoft's shares'. Common sense will tell you that this particular reason alone will not suffice to move Microsoft's share price. Let's consider the scenario. On the latest fiscal year, Microsoft earned $ 12.59 Billion while Yahoo! earned $ 1.9 Billion, less than 15% of Microsoft. Assuming an astounding earning growth of 50%, Microsoft total earning will rise 7% due to the Yahoo! acquisition. This is hardly inspiring.

The author made a good point of combining Microsoft/Yahoo market share in the search business to rival that of Google. The combined company will have a 42% search share versus 44% for Google. That does not mean a thing. What both companies need right now is not to get bigger, rather to provide better search query result just as what Google did from the moment it existed. A 42% market share will eventually shrink to 0% if the quality of search result is poor. Therefore, talking about market share is rather useless here. This reminds me of the HP-Compaq merger, which eventually was a slugfeast for rival Dell.

As the author concurs, the two culture might be difficult to mesh. Further, there would be anti-trust issue lingering with anything that Microsoft acquires. Also, Yahoo! is now valued at a premium. Microsoft needs to pay even higher to acquire Yahoo! and the synergy might not even be realized. It is realistic to estimate that Yahoo! will cost Microsoft around $ 50 Billion.

Based on the above, I feel that Microsoft should forget buying Yahoo! and concentrate on other things to increase shareholders' value. A few suggestions came into mind:

1. Buy back more shares. How about $ 20 Billion a year? That would increase Earning per Share (EPS) by 7.8%, which is better than expecting a 50% earning growth from the Yahoo!'s acquisition. Furthermore, if they spend yet another $ 20 Billion next year, EPS growth will be again higher. Yahoo! acquisition will cost more than that and it might not even work. This buyback will surely work!

2. Buy smaller competitors. If you buy out your biggest competitors, you are admitting defeat. Microsoft in theory can buy Google at the current price. But what would other people think? Besides, you buy smaller competitors for its technology and talents, not for market share. That is what Microsoft should concentrate on. When you have the technology to provide better search, market share will follow. A lot of smaller competitors do exist but no one can develop a decent search engine.

3. Partnership is better than acquisition. Recent partnership with Facebook (instead of acquiring it) is seen as a better deal since Microsoft fails miserably for big acquisitions. They can strike similar deal with Yahoo. If the partnership goes well, Microsoft can always buy Yahoo! sometime in the future. There is no need to rush just for the sake of growing earnings and boosting share prices.

END

You can view other helpful commentary by clicking here

Distributing your own investing content is easy. Simply, click here.

Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Microsoft Corp. (MSFT) or any other securities.

[Resources] [Forum] [Link Partner ] [Novice Investing Directory ] [ Submit Your Article Here ]