Thursday, December 11, 2008

Can You Spare $15 billion?

A hedge fund has come up with a great idea for Microsoft and Yahoo! Microsoft should immediately overpay in cash for Yahoo's search engine business, which is becoming less valuable by the minute. The $15 billion bonanza for Yahoo's shareholders would generate higher future cash flows and result in shares being bought back returning money to impatient shareholders, like the hedge fund. Microsoft may be anxious for a deal, but surely they haven't lost sight of reality.

What about carving out the search business into a separate entity? I would call it "Yahoo?", as opposed to the parent Yahoo! Let Microsoft buy a stake in the entity, take a board seat, and get some cooperative ventures signed and a right of first refusal to an unsolicited bid; sell the rest to the public. Over time, let's see where the value of the entity goes. Instead of a windfall bonanza to Yahoo!, this probably puts a floor to the valuations and could wind up developing more value over time and result in a bidding war later, when companies are more flush and valuations richer. In this model, cost-cutting benefits accrue to both parties in the form of higher earnings for the carve-out. A secondary benefit would be a large injection of fees into the beleaguered investment banking M&A business.

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