Friday, December 12, 2008

"New Strategy" with or without Yahoo?

There has been recently increased pressure from Yahoo shareholders to address negotiations with Microsoft. Reports indicate that Icahn Partners recently acquired 7 million more shares of Yahoo. This reflects Icahn's intention to maxamize a return on the Yahoo investment. Carl Icahn has through CNBC announced "Yahoo is still undervalued".

According to CBS Marketwatch, another hedge fund, Los Angeles based Ivory Investment which owns 21 million shares are seeking Yahoo to enter a deal with Microsoft. The hedge fund values Yahoo search business at approximately $15 billion.

Recently, Jeff Lindsay, an analyst with Sandford Bernstein stated that Yahoo search business was not worth any more than $3-$5 billion. This statement was endorsed by analyst Mark May of Needham and Company which stated "Ivory's $15 billion evaluation is to high considering Microsoft's previous $1 billion offer".

Both Icahn Partners and Ivory Investment have large stakes in Yahoo. However, both firms only want to see the value of Yahoo increase so a profit will be realized for the funds. The question is, is it the "best" strategy for both companies?

The answer according to shareholders, analysts and reporters has subsequently been "NO".
Additionally, Mr. Ballmer has stated that Microsoft has resolved all negotiations with Yahoo. However, both Icahn Partners and Ivory with large Yahoo stakes are going to seek to rally support and force a Yahoo and Microsoft negotiation. This strategy according to shareholders, reporters and analysts will be detrimental to both companies rather than beneficial.

Therefore, it is imparative that Microsoft shareholders rally support and effect a "New Strategy" before Icahn Partners and Ivory Investments pressure Yahoo to sell to Microsoft for a premium price. This will fail to create true value for Microsoft shareholders.

Microsoft was originally seeking to spend $45 billion to acquire Yahoo. This price was a 65% premium. Icahn Partners believes that Yahoo is currently undervalued. Carl Icahn has been in dicusssions with Mr. Ballmer in the past. Therefore, there is the potential for Mr. Icahn to approach Microsoft to reopen negotiations. This will fail to create shareholder value for Microsoft.

During Icahn Partners bid for Yahoo, reports indicated that 11 of the 20 largest institutional shareholders owned stock in both companies. Firms such as CRM, State Street and Vanguard own hundreds of millions of Microsoft shares. Recently, SEC filings indicate CRM owns 280 million Microsoft shares. Therefore, CRM and other large shareholders want a strategy that will benefit both their Yahoo and Microsoft holdings.

We have developed a proposal called a "New Strategy". We are seeking to rally support. In our blog we have stated that we are seeking a tactic similar to Ironfire Capital and its use of the Internet to rally support to effect change at Yahoo. We have also stated that we are seeking to use a tactic similar to Pershing Square to effect change at McDonalds. Pershing Square created a presentation and invited shareholders, reporters and analysts. We are arranging a presentation which will hopefully include reporters, shareholders and large insitutional shareholders, such as CRM.

Our "New Strategy" outlined a proposal that will enable Microsoft to utilize current market conditions to accelerate growth. Sir Branson of Virgin Group during a CNBC interview stated that current volatility enables companies with strong financial balance sheets to emerge larger and stronger. Additionally, the CEO of Broadcom announced through CNBC the company intention to pursue acquisiton during current market conditions.

Our proposal incorporated strategies that enables Microsoft to deploy less capital then its bid for Yahoo. Our strategy enables Microsoft to acquire two companies at approximately $30-35 billion based on current valuations. Subsequently, this is $10 billion less than its Yahoo bid.
The Yahoo bid will have increased Microsoft annual revenue from $60 billion to $67 billion. It will have increased net income from $17 billion to $17.6 billion.

Our "New Strategy" involves acquiring two companies. We propose it acquire a major bank and enter finanical services. We suggested it acquire ING. This is a global company. Through 2005, 2006, 2007 the company has experienced an increase in revenue growth. The company according to 2007 reports generated $211 billion in revenue and $14 billion net income. Similar to other companies it is trading at record levels. We stated that this will correct and ING will increase in value. Since starting this effort of rallying support, ING share price has risen. When we started research one month ago ING was valued at $16 billion. It is currently valued at $20. Hypothetically, had Microsoft acquired the company when first mentioned, it could have potentially realized a $4 billion gain on acquisition.

We also recomend that Microsoft acquire a handheld company to propel growth into this growing sector. Currently, Microsoft operates Microsoft Mobile. We suggest that it acquire Sprint Nextel. According to 2007 reports, this company generated $40 billion in revenue.

Microsoft through these acquisitions will create a company that through combined operations generate approximately $320 billion in annual revenue. It will also enable the company to generate approximately $30 billion in net income.

This "New Strategy" enables Microsoft to enter financial services. It enables the company to provide lines of credit, mortgages and other financing to companies. It creates synergy with our proposal for Microsoft to eventually acquire commercial real estate. It will enable the company to provide several financial services to companies. It also enables Microsoft to become one of the worlds largest financial companies.

The "New Strategy" enables Microsoft to accelerate growth into the handheld sector with the acquisition of Sprint. This will enable Microsoft to control the third largest wireless company. It will enable Microsoft to acclerate into wireless services. It also provides Microsoft with $40 billion in additional annual revenue. This company can currently be acquired for approximately $7 billion.

However, the question that remains is what about Yahoo. This is a languishing company. Historically, Netscape was eliminated by new technology. AOL proved almost worthless to Time Warner. Now, Yahoo which was once a Wall Street darling is heading towards a precipice. However, numerous shareholders, reporters and analysts state that Microsoft acquiring Yahoo would prove to be a "poor strategy".

We suggest that Microsoft pursue acquiring a search deal. Mr. Ballmer has indicated this potential. However, Mr. Ballmer has also failed to articulate positive and definitive strategy for the company. It is possible Mr. Ballmer could be pressured or persuaded by Icahn Partners to acquire all of Yahoo. This would be a waste of Microsoft capital and would fail at creating lasting value.

We suggest it pursue a "search" only deal. As mentioned, it would enable Microsoft to acquire an asset for approximately $3-5 billion. This deal will be more benefical to both companies. It would enable Microsoft to become competitive with Google. It would enable Yahoo to obtain a cash injection and potential annual cash flow.

Through our "New Strategy" based on current valuations Microsoft can deploy $20 billion to acquire ING. It can spend $7 billion to acquire Sprint. It can spend $3-5 billion to acquire the search deal with Yahoo. If Microsoft offers a modest premium for all three assets it will still ultimately spend less than its Yahoo bid of $45 billion. The "New Strategy" will create a company that has $320 billion in annual revenue, $30 billion in net income, and compeitive in both wireless and search sectors.

We are seeking to rally support. We are asking that Microsoft shareholders rally support to effect a "New Strategy". It is imparative to rally support before Icahn Partners or Ivory Investment through the media influence a entire sale of Yahoo to Microsoft. This strategy will fail to offer similar value as our "New Strategy"

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