Yahoo Inc.'s annual revenue is less than $7 billion. Yet, Microsoft wants to pay $45 billion or so for the Web search company on the argument that the combination "would enable us to jointly deliver a broad range of new experiences to our customers that neither of us would have achieved on our own."
Yahoo is not worth $45 billion and its rival Google Inc., is certainly not worth the inflated $500-plus per share investors are currently paying.
If a counter-offer emerges from other industry players and financial companies start lining up to fund the deal, then I will eat my words. One year ago, that would have happened. Not today, when the market is suffering from the indigestion of our past gluttony.
Microsoft CEO Steve Ballmer obviously disagrees. That would explain the 62-percent premium the company is willing to pay for Yahoo.
Will a counter-offer emerge? Will Yahoo, which has in the past spurned Microsoft's offers, ask for a higher amount? It's still possible. However, prior to Microsoft's offer early Friday (Feb. 1), investors had valued Yahoo at about $25.7 billion.
Yahoo shares would have tumbled even more following Google Inc.'s negative earnings had Microsoft not charged in with its offer.
Microsoft's $31 per share offer for Yahoo is close to the company's 52-week high of $34.08 and, based on this, it is tempting to justify the price Microsoft is willing to pay for the company.
The offer could be reasonable for Microsoft. With more than $20 billion in cash as at the end of December and a positive cash flow that's the envy of its rivals, Microsoft can easily finance the acquisition—using a combination of cash and stocks—without calling upon any banks for support.
In today's financially constrained climate, however, few, if any commercial banks would support the transaction were a venture capital company hawking it.
Until very recently, Yahoo and Internet rival Google Inc., were considered red-hot companies that would redefine global commerce. That's why investors pushed up Google's market capitalization to $176 billion as at the end of trading on Thursday. At the 52-week high of $747.24 per share, Google's market value was a ridiculous $233.8 billion.
In early trading on Friday, Google's stock price fell almost 10 percent to an intra-day low of $515.87, giving it a market value of $161.4 billion. Fifteen billion dollars in value wiped out overnight? It would be appalling if not that we are talking paper value here.
How could this happen? The answer is simple. Google was never worth anything near the high valuation analysts and investors gave the company.
Both Yahoo and Google are Internet-based companies. Notwithstanding their attempts to enter new businesses, advertising remains their main revenue source. While companies are directing more of their marketing dollars online, this doesn't mean other avenues have been completely closed.
Print media, however challenged, remains an option for many companies, all of which still direct a huge portion of their advertising budgets to conferences, direct mailing, television and radio, etc.
Moreover, it was highly unlikely that Yahoo and Google could have ever monopolized the Web-advertising business. These companies might be big in the United States, but rivals in Europe, Asia and other parts of the world are getting some action and could easily overtake them.
Microsoft's bid for Yahoo is a major gamble the company can afford to finance without recourse to other financing sources.
Even so, this doesn't justify spending almost $45 billion on a company with $7 billion in annual revenue.