SubscribeMarket Rebound: Merger Mania is Back
A Wall Street titan is dead. It grew so large and its weight got so cumbersome its knees buckled. As I write, the all-American giant is crumbling to the ground with cash spewing out of every orifice.
In case you missed the news this morning, Microsoft (MSFT:NASDAQ) just made a historic move. It announced it is willing to purchase Yahoo! at a the jaw-droppingly high price of $31 per share. History books will show paying the 62% premium will go down as one of Bill Gates’ greatest blunders.
I have spent a good part of my career studying business life cycles. Since then, every growth spurt has led to less efficiency, slower product growth, and declining equity valuations.
Today’s news that Gates will buy Yahoo! at nearly any price is all the evidence the coroner needs to zip up the body bag and declare Microsoft legally dead. When the only way a company can find growth is to pay an extreme premium for it, there are major flaws in its strategic plan. Instead of buying Yahoo!, Microsoft needs to be selling its less-critical business segments to the floundering search engine.
Ego Spending
But when your CEO is the world’s richest man, what is a few billion dollars in lost shareholder equity? It is apparent this move is not about profitability. It’s all about ego.
One person that loves the possibility of a Microsoft/Yahoo! merger is Eric Schmidt, the chief executive of Google (GOOG:NASDAQ). His ego is soaring this morning.
For the last five years, Google has outsmarted, outpaced, and outsold Yahoo! and its meek search engine presence. Just because Microsoft may be getting involved, does not mean Yahoo! is suddenly going to surge in popularity or profitability. For Google, it is simply one more competitor out of its way.
For investors, this is a great time to take a close and hard look at Microsoft and its investment value. If you are holding the position long and you were not lucky enough to sell out before all of this news, you are going to have to keep holding for quite a while longer before share price appreciates back to yesterday’s valuations. Share price is already dropping because of the news.
They lose, you win
If you are looking to make money off this deal, you have two options. The simplest is to wait a few days and buy shares of Google. Its share price took a sizeable dip on the news. Believe me, it will be back up in no time as Wall Street works its magic.
Your second option, and the one with the most profit potential, is to short Microsoft using put options. The April 08 puts are going to experience huge amounts of volatility over the next three months. Buy something with a strike price close to yesterday’s closing price of $32.60 and you could rack in some hefty gains.
Do not ever forget that Wall Street represents living, breathing corporations. Just like everything else on this earth, those companies mature and grow. But the process can only last so long. After a period, every company hits a growth ceiling and all it can do is spread out, reducing profitability.
Today’s merger talk is proof that Microsoft has reached its peak. Now, the only way it will find more profits is if it spends a premium for them. It won’t be a pretty death.
Andrew Snyder
Baltimore (TFN)
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Comment by Yvez T.T. Cosntance on 3 February 2008:
Microsoft buys Yahoo………when did MS slip a new file named “stupid.exe” in Vista. I am baffeled by how one of the largest American Corps. forgot it already failed attempting to obtain dominanace of the World Wide Web, correct me if I am wrong, wasnt it the “.net” trial and error? How does a Corporation so large with above average results providing computer owners an operating system and lately some great software, think buying Yahoo is of benefit. How many times have we seen diversification sink a well established business model. My greatest recollection was Tyco in the mid 90’s. I hate come across with complete negative opinion, but what is so great about Yahoo. They are the biggest victim of Google, what few services/products I have utilized were not worth the money paid. I just helped my neighbor get Instant Messanger off a laptop that renedered numerous apps. inacessible. MS with such significant dominance already having failed and currently failing with MSN is making another botched attempt at the WWW. Buy Google!! while they keep spending their profits on MS operating systems. I find this hard to comprehend. I welcome everyones input for the positive benefit of this blunder that I dont see.
Yvez T.T. Constance
Comment by Stephen Oakes on 4 February 2008:
Yves,
I hear you on this one. The situation looks to be heading for marriage counseling. Off the top of my head, the only successful diversified company is General Electric. Of course, they got rid of poor performing segments during the Jack Welch era. With Microsoft, it’s simply an effort to find acquire growth since they have little or none of their own. Have to keep those shareholders happy ya know! Haha
Comment by Yvez T.T. Cosntance on 4 February 2008:
Dear Stephen,
What happened to the bright idea of fixing a failing web site index bot / spider for a million bones and continue building while fixing a failure continuing on what has already been started. I guess if your Gates money is no object, do it the easy way, if you cant keep up with the competition, BUY EM! Odd you bring up growth…….Yahoo has not been doing very well the past few years, add a “stupid.dll” file in Vista. Somebody please enlighten me of the positive to justify and determine my consideration of short here! I know that sounds odd, but PLEASE!!!
Comment by Stephen Oakes on 5 February 2008:
Hey Yvez,
I really can’t target a reason to be bullish here. I fully expect MSFT to continue its price slide. Enjoy your profits — should be an easy call to make