My Prediction on the Microsoft / Yahoo Deal

This weekend, Steve Ballmer, CEO of Microsoft, fired off a missive to the members of the board of Yahoo! Accept the deal that we proposed a few months ago, or else the original proposed deal will be pulled off the table. In his letter, Ballmer gave Yahoo three weeks to accept his deal or risk having the original bid cut and a proxy campaign mounted against Yahoo's board.

The proposed deal is $42.4 billion dollars, or $31 per share.

Yahoo has twiddled its fingers and not said much about the proposed deal, to the general public or to Microsoft. In the background of the talks, Yahoo has tried to negotiate "alliances" with AOL and News Corp., without much success. Yahoo has clearly hoped that another bidder would come marching along, forcing Microsoft into a bidding war, but none has emerged.

In a letter apparently sent to Microsoft on Sunday, Yahoo management contended that they are not opposed to a deal with Microsoft; they just want more money. Rumor has it that Yahoo wants at least a few dollars per share added on to the purchase price.

It's a game of chicken right now. It's obvious to me that:

1. Microsoft wants Yahoo! badly.

2. Yahoo would allow itself to be purchased by Microsoft.

Who will blink first?

The key date that you will need to keep an eye on is April 22nd, 2008. This is the date of Yahoo's next earnings report. If a deal is going to be done, then it will be done before this report. I can't imagine Yahoo having an overly powerful earnings report, and I would imagine that they would want to have a deal closed before this date.

Microsoft knows this, which is why they set a deadline. They know that Yahoo management does not want to release these earnings as a still-independent company. Yahoo can say whatever they want about their business not deteriorating, but if you look at the current state of the economy, it is almost impossible to imagine a scenario in which Yahoo would perform better than expected in this current earnings report.

If Microsoft pulls their bid and Yahoo reports weak earnings then Microsoft will be in a much stronger position to buy the company at a lower price.

My prediction? Look for a last second flurry of negotiating activity on the 20th and 21st of April, with a deal being sealed a day or two before the earnings report is released. I am predicting that Microsoft will sweeten their deal by around $1 per share in order to get the deal done. That's my prediction.

Filed under: Internet Companies