Essay: Microsoft’s Bid for Yahoo: The Reason to Acquire Yahoo, Abnormal Return of Competitors, and Cross-Shareholding

(1) The Reason to A cquire Yahoo

(2)

(3)

(4)

(5) Abnormal Return of C ompetitors

The below chart shows abnormal return of Google and other competitors for Yahoo (see exhibit (5)-1). While the Google’s abnormal return was negative on the announcement date, some of other firms in Yahoo’s industry had positive return. We would like to discuss the reason about this result from two sides, Google and other competitors as following:

² Google:

The reason why Google’s abnormal return dropped is that this deal would create the most formidable competitor for Google in the searching engine and web advertising business. As a result, the market thought Google’s profitability would be decreasing because the intensity of competition would increase.

² Other competitors:

According to the New York Times on February 1, “With its potential to redraw the battle lines in the struggle for Internet domination, Microsoft’s $44.6 billion bid for Yahoo may end up putting other companies in play .” Other companies indicated AOL owned by Time Warner, News Corporation and so on. Hence, investors would buy other competitors’ stock on speculation like this. In consequence, their stock price would increase.

[ Exhibit (5)-1 : Abnormal return on February 1, 2008]

(Source: Yahoo finance)

(6) The Cross- Shareholding

According to Appendix II, more than half of the top 15 institutional investors for Microsoft and Yahoo have shares in both of them. Theoretically their objective is to hold broad portfolio of investments with the view to spread risk and to maximize their overall performance. Hence, they would require the highest possible price if they owned only Yahoo. However, in this case, they cannot be up-front to state that Microsoft pay more due to the cross-shareholding i.e. if higher bid boosts Yahoo stock price, it cut down Microsoft stock price.

The transaction value of this deal for them should be based on the combination of cash from Yahoo’s stock and the value of Microsoft. In fact, while Yahoo’s stock price has increased from 19.18 on the announcement date to 29.87 as of February 11, 2008, Microsoft’s stock price has fallen from 32 .6 to 28.21. As a result, the total of eight cross-holding largest shareholders lost about US$2.6 billion (see exhibit (5)-2). This is because many large institution shareholders, those own both firms’ shares, have bigger stakes in Microsoft than in Yahoo.

Basically it is not unusual for institutional shareholders to hold both firms involved in mergers. In cases like this, institution investors would be more concerned about the overall performance of their fund than individual performance in the voting behavior.

[Exhibit (5)-2: The cross-holding Institutional Shareholders]

(Source: Yahoo finance & Course material)