Microsoft Investors Don't See Gains From Yahoo Deal (Update2)

By Dina Bass


Feb. 2 (Bloomberg) -- Some Microsoft Corp. shareholders say the software maker's $44.6 billion bid for Yahoo! Inc. may backfire and reduce its ability to compete with Google Inc. in Internet consumer services and advertising.

``This is a stupid deal, and I'm not happy,'' said Jane Snorek, who helps manage more than $70 billion in assets at First American Funds in Minneapolis. She said the firm began selling much of its Microsoft position yesterday, when the stock dropped 6.6 percent, the most since April 2006. ``I'm expecting slow market-share erosion from Microsoft and Yahoo.''

Microsoft Chief Executive Officer Steve Ballmer is attempting the biggest technology takeover after his own efforts failed to narrow the gap with Google. Acquiring Yahoo would still leave Microsoft with a smaller share of the Web search market, and Ballmer would face the distraction of combining the businesses, said Colin Gillis, an analyst at Canaccord Adams in New York.

``Sergey and Larry are going to have no problems sleeping,'' Gillis said, referring to Google founders Sergey Brin and Larry Page. ``I don't see them tossing in their beds tonight.''

Gillis recommends buying Google shares, has a hold rating on Yahoo, and doesn't cover Microsoft. He said he doesn't own shares in the companies.

Microsoft Falls

The $31-a-share bid of cash or Microsoft stock is 62 percent more than Yahoo's closing price on Jan. 31. Microsoft, based in Redmond, Washington, fell $2.15 to $30.45 yesterday in Nasdaq Stock Market trading. Ballmer, 51, has presided over a 44 percent drop in Microsoft shares since taking over as CEO in January 2000.

Yahoo, which reported its eighth straight quarter of declining profit this week, had dropped 18 percent this year before the offer was announced. The shares rose $9.20, or 48 percent, to $28.38 yesterday.

Holders of Yahoo stock would be able to choose to take $31 in cash or 0.9509 of a Microsoft share for each Yahoo share. Microsoft will pay for half the purchase with cash and half with stock, the company said.

Yahoo, based in Sunnyvale, California, also has failed to break Google's hold on the market, losing Internet search users and share of the online ad market. The stock had lost almost half its value in the past two years before the deal was announced.

`Struggled Mightily'

``Yahoo has struggled mightily to compete against Google,'' said Dave Stepherson, a fund manager at Hardesty Capital Management in Baltimore, which holds about 281,000 Microsoft shares in its $650 million under management. ``That is not going to change just because they're pairing up with Microsoft.''

The price is ``incredibly expensive,'' and Microsoft may have done better by making smaller purchases to build out its own business, he said.

Ballmer himself told analysts in July 2006 that buying Yahoo wouldn't help Microsoft improve its search business, because only Google has a better quality product than Microsoft.

``There's no acquisition path,'' Ballmer said when asked whether Microsoft should make a large purchase.

Microsoft's bid is more than seven times larger than the $6 billion the company paid for AQuantive Inc., its largest previous acquisition, which was completed in August. Microsoft doesn't have the experience to fix and combine Yahoo, said Jon Fisher, a portfolio manager at Fifth Third Asset Management in Minneapolis.

`Fixer-Upper'

``They never bought a fixer-upper before,'' said Fisher, whose firm manages $22 billion, including Microsoft shares.

The acquisition will probably face lengthy regulatory scrutiny, said Peter Kadzik, an antitrust partner at Dickstein Shapiro, a law firm in Washington. The U.S. Justice Department said yesterday that it is ``interested'' in reviewing the proposed combination. Neelie Kroes, commissioner of competition for the European Commission, will also investigate, she said yesterday.

Still, the deal would likely be approved because Google would continue to lead the Internet advertising market after the purchase, Kadzik said.

Google captured 56 percent of U.S. Web queries in December, almost double the combined share for Yahoo and Microsoft, which attracted 18 percent and 14 percent, according to New York-based Nielsen Online.

Microsoft Optimism

Some Microsoft shareholders were pleased with the bid.

``If Microsoft executes well, it could be a really good deal,'' said Robert Doll, who oversees $1.3 trillion as chief investment officer of global equities at New York-based BlackRock Inc. The firm owns Microsoft shares. ``The ball is going to be in Microsoft's court.''

The deal also makes sense because Yahoo is strong in Asia, while Microsoft's Web sites are popular in Latin America and Europe, said Bob Ivins, executive vice president of ComScore Inc., a market researcher in Reston, Virginia.

``When you combine the strengths of our two companies, the result will be an incredibly efficient and competitive offering,'' Ballmer said on a conference call yesterday. ``We believe now in those benefits more than ever.''

Yahoo said yesterday that it plans to evaluate the proposal ``promptly.''

Microsoft's bankers, Morgan Stanley and Blackstone Group LP, could split about $53 million in fees, and Yahoo's may get about $80 million, according to Bloomberg estimates based on publicly disclosed fees from about 600 transactions since 2005.

Microsoft had considered paying a per-share figure in the mid-$30s range, before its bid of $31, the New York Times reported. The newspaper also said Yahoo's investment bankers, Goldman Sachs Group Inc. and Lehman Brothers Holdings Inc., approached other potential suitors yesterday, including News Corp. and AT&T Inc.

News Corp. spokeswoman Teri Everett and AT&T spokesman Mark Siegel didn't immediately respond to requests for comment from Bloomberg News via phone and e-mail messages. Yahoo spokeswoman Diana Wong declined to comment.