For the last several weeks the concerns over the swooning stock market and the busted credit markets could be seen in the long faces on the commuter trains to Greenwich. Today they can be detected in the stock price of Yahoo!.
On Feb. 1 Microsoft announced a bid to acquire Yahoo for $31 a share. In better times the unexpected, opportunistic pounce by the beast slouching from Redmond would have been expected to ignite a bidding frenzy. Sure, Yahoo had fallen on hard times as it struggled to compete with Google, and its stock had plummeted to the teens. But Microsoft did offer a 62 percent premium to the market price. Given that Yahoo traded above $31 as recently as November, it should have been clear that this was a starting bid, not the final offer, the opening act in the normal kabuki of deals. First, the target of an acquisition refuses the private offer several times. Which is what Yahoo did. Then, when the offer is made publicly, the target declares the offer to be insultingly low. Which is what Yahoo did on Monday. The next steps are for the acquirer to boost the bid, or for other interested parties to make alternative offers, or for the target to start evasive action.
Given this, one would expect Yahoo stock to have risen more than it has. (It trades today at about $29.50, a few percentage points below Microsoft's baseline offer.) This is bizarre. After all, Microsoft's ability to close is on a par with that of Yankees reliever Mariano Rivera in his prime. Perhaps the most solvent company ever created, Microsoft has a stock market valuation of $262 billion, $21 billion in cash and no long-term debt, and adds to its cash pile every quarter. The likelihood of Microsoft being willing and able to pay more than $31 for control of Yahoo is reasonably high.
Second, with its public bid, Microsoft has put one of the great global Internet brands into play. In effect, by refusing the offer, Yahoo has invited the world's private equity funds, sovereign wealth funds, and high-flying Asian, Indian and Russian technology and media companies to make a better offer. Sure, $44.5 billion is a big gulp to swallow, and Yahoo faces its challenges. But there are vast pools of capital around the globe looking for a home.
In normal times exuberant investors, anticipating an inevitable bidding war and the prospect of Microsoft offering a higher price, would have piled in and sent Yahoo soaring. Every Wall Street firm and many hedge funds have millions or billions devoted to merger arbitrage—i.e., placing and hedging bets on the outcome of pending deals. But this time around the arbs have reacted with admirable restraint. That's because while betting on the completion of proposed corporate takeovers during a bull market is a brilliant idea, it's a recipe for disaster once the credit cycle turns. In recent months merger arbitrage has been turned into a sucker's game, thanks to the latest disease to afflict middle-aged men: erect-deal dysfunction.
The last few months have brought a series of busted deals, mostly involving private equity funds that could not—or would not—consummate previously announced hookups. Last April, Goldman Sachs and KKR agreed to acquire Harman International for $120 per share. Investors, banking on the sterling reputation of Goldman and KKR, bid up the stock to $110. But since September, when Goldman Sachs and KKR pulled out, the stock has wilted. It now trades at about $41. The same fate befell investors who bet on J.C. Flowers completing its proposed acquisition of student lender Sallie Mae. Last April the deal was announced at $60 per share. The deal broke down in the fall, and Sallie Mae now trades under $20. Investors who similarly banked on the ability of Cerberus to close the deal with United Rentals, or on the Blackstone Group's ability to close on PHH, suffered the same disappointment. As Henny Sender reported in the Financial Times on Monday, the spate of busted deals has suppressed the appetite for speculation on mergers and put some of the funds that specialize in M&A out of business.
Given the lack of excitement surrounding the bid for one of the globe's top technology businesses, perhaps they should rename the company "yahoo."