Yahoo stock drops 15% as Microsoft pulls offer

Associated Press
Published: Tuesday, May 6, 2008 12:20 a.m. MDT
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SAN FRANCISCO — Yahoo Inc.'s stock took a beating Monday after Microsoft Corp. withdrew its $47.5 billion takeover bid, but the punishment wasn't as severe as many analysts anticipated because investors suspect the rivals eventually will renew their mating dance.

Although Microsoft has publicly indicated it will focus on measures besides buying Yahoo in its bid to make its Internet division profitable, several analysts predicted the software maker will revive its bid in the summer or fall if Yahoo can't snap out of a two-year funk that exposed it to an unwanted takeover in the first place.

"Should the frustration of (Yahoo) shareholders come to a boil, we believe (Microsoft) could re-enter the picture, essentially playing the role of the white knight," analyst David Hilal of Friedman, Billings, Ramsey & Co. wrote in a Friday research note.

With similar opinions reverberating through the stock market, Yahoo shares shed $4.30, or 15 percent, to close Monday at $24.37. That wiped out nearly half the gain they made since Microsoft made its bid Jan. 31. The drop left the Sunnyvale-based company's market value about $12.5 billion below Microsoft's last offer.

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"I was expecting to see a more extreme reaction" to Microsoft's withdrawn bid, Stanford Group analyst Clayton Moran said. "Microsoft is trying to make it seem like it's not coming back (with another bid), but this somewhat muted reaction shows the market isn't buying it."

Meanwhile, Google Inc., whose dominance in online search triggered Microsoft's bid, seems poised to benefit no matter how the talks go from here.

Microsoft ultimately offered $33 per share, only to be rebuffed over last weekend. Yahoo co-founders Jerry Yang and David Filo, who still own a combined 9.7 percent of the company's stock, flew to Seattle to demand $37 per share — a price Yahoo's stock hasn't reached in more than two years. The insistence on a higher price prompted Microsoft Chief Executive Steve Ballmer to yank his offer off the table.

Yahoo's stock price stood at $19.18 before Microsoft made its move.

Monday's backlash was enough to turn up the heat on Yang and the rest of the Yahoo board, which unanimously rebuffed Microsoft. The unrest could lead to a rebellion at Yahoo's still-unscheduled annual meeting, where shareholders could try to oust the board. Yahoo must hold the meeting by mid-July.

The blow to Yahoo's stock also was cushioned by expectations that the company will soon announce it's turning over some of its advertising space to Internet search leader Google Inc., whose technology yields higher profits from commercial links.

But many analysts think working with Google could be a mixed bag for Yahoo. While Google could boost Yahoo revenue by anywhere from $850 million to $1.6 billion annually, it might also hurt Yahoo by undercutting the appeal of its own ad platform.

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