What Will Happen To The Microsoft-Yahoo! Acquisition?

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What Will Happen To The Microsoft-Yahoo! Acquisition?

Yahoo! released their much awaited financial results for the first quarter of the year. While the result is not spectacular, it is better than predicted by some analysts. Some think it could be good enough to keep Microsoft at arm’s length for a while. The Street seems to disagree.

Net revenue for the quarter came in at $1.35 billion (compared to a consensus of $1.32 billion). The overall revenue growth has gone up from 8% to 9%, which can be referred to as marginal at best. However, the revenue and cash position have both been boosted by one-time payments from AT&T ($350 million) and a non-cash gain of $401 million related to Alibaba Group’s initial public offering of Alibaba.com. The actual adjusted cash flow is about 20% less than that of last year.

Yahoo! President Sue Decker and others in the company seem to be quite satisfied with the results and tend to blame the economy for the weakness in finance and retail. The net earnings, however, are 11% below those of the first quarter of last year, and the stock price fell by 8% ($0.15), during after-hours trading on Tuesday, just after the results were declared.

The advertising system, Panama, is yet to start showing positive results. In the meantime, the higher operating cost incurred means the overall revenue gains have come down from $160 million to $142 million. Terry Samuel, CEO and Chairman of Yahoo! feels they have made good progress with their outlined goals, and are set to capture major growth opportunities in the future.

Analysts’ Opinions

Wall Street does not seem to be blinded by the superficial increases in revenue or cash. The underlying truth is quite plainly visible for all analysts to see – Yahoo! cannot continue to grow on its own.

Jim Friedland analyst at Cowen &Co. said, “Microsoft is breathing a sigh of relief. Even though these are solid results, given long and short term challenges, there’s been no overall shift in Yahoo!’s business. Microsoft’s offer is still the best offer on the table.”Mike Binger, fund manager at Thrivent Financial says, “I would say at this point, Microsoft would stay their bid.” Susquehanna Financial Group analyst, Marianne Wolk, also shares that opinion. She says “This doesn’t change the picture much at all.”

Blake Jorgensen, CFO of Yahoo! says the results are “right on track”, despite the distraction of Microsoft’s offer. He adds that they are not opposed to a deal with Microsoft, but only to a value which discounts the underlying value of the company.

Yahoo! has declared their first strong quarter in a while. Microsoft could wait to let their steam drop, rather than raise their bid price. Yahoo! could pull out all the stops in one quarter or two, but they just aren’t good enough to keep the results up, and when they fall, Microsoft will swoop in for the kill.

However timing is of the essence, and if shareholders see through the overall revenue increases and realise that Yahoo!’s core business is not improving, the sale could be imminent. Microsoft CEO, Steve Ballmer had said before the results were declared that their resolve would remain unchanged, irrespective of the results. Sources at Microsoft said there was no reason to revalue their offer of $43 billion.

Will They Act Or Will They Go?

Bloomberg News speculates that Microsoft’s bid to take control of the Yahoo! board may start as early as this weekend. Meanwhile, PC World reported that Steve Ballmer threatened to walk away from the deal, when speaking at a conference in Milan on Wednesday.

Is this just acquisition politics? Will the board of directors at Yahoo! be ousted? Or will Microsoft give them the cold shoulder and just move on?