YHOO and HP Goose the Market, Financials Slap It Back Down

Jerry Yang has announced he will step aside and allow Yahoo to seek a new CEO.  This is probably one of the best decisions Mr. Yang has made for the company in a very long time.  His decision to scorn Microsoft's $40 billion bid for Yahoo will go down in history as one of the worst made by a non-financial company CEO.  That statement is not in hindsight.  It was patently clear at the time to anyone with half a brain that the company should've accepted Microsoft's bid.  I don't attest to have more than half a brain but you can read my comments mocking the idiot analysts at the time who kept claiming how badly Microsoft (holder of multiple billions in cash) needed Yahoo ($18 stock at the time with declining prospects) and how Mr. Softy would certainly raise his bid to win his prize.  Microsoft may or may not be back now that Mr. Yang is stepping down, but it is unlikely to bid much of a premium in this market.

In the surprisingly good new department, Hewlett-Packard actually raised guidance for the fourth quarter.  I know, I can't believe it either.  But good news is rare these days, so the market will take what it can get.  

Futures were higher on the HP and Yahoo news, but the market is roughly flat in early morning trading as attention returns to battering the living stuffing out of financials.  Make no mistake, the financials deserve their battering.  Hank Paulson and Ben Bernanke are testifying on Capital Hill today with Sheila Bair in tow.  Mr. Paulson has noted that he does not intend to use any more of the TARP while in office, unless absolutely necessary (i.e. some bank or insurance company calling him at 3 am).  Since financials trade mostly on government intervention news, investors are hoping to figure out what the newly elected administration plans to do with the rest of the money and if some companies will actually make it until the new administration takes over in January without an injection of funds.  This explains why insurance stocks are getting pounded and why they are considering buying small savings and loans to access to more liquidity.          

Meanwhile, In Techland, Microsoft and Google Disappoint

Google and Microsoft both disappointed investors with weaker than expected earnings.  Google's earnings missed analysts' estimates, although profit rose to $1.25 billion from $925.1 million from the prior year.  Excluding some items, Google's earnings were $4.63 a share.  The stock is taking a bit of a beating today, essentially reversing the gains it took the last time Google reported earnings that surprised to the upside.  The company admitted that a pullback in the economy was affecting the rate of "paid clicks" on search advertisements that generate revenue.  The paid-click rate decreased 1% from the previous quarter but grew 19% from the same period a year earlier.  Clearly, the stock is slumping because investors expect surprises to the upside from Google, something the company has been able to deliver consistently.  The perverse logic of today's market indicates that it is better to lose $2.5 billion when investors are expecting losses of $5 billion, rather than make $1.25 billion when investors were expecting profits of $1.26 billion.    

Microsoft, on the other hand, posted profits of $4.3 billion, a 42% increase from the prior year's second-quarter on revenues of $15.8 billion, an 18% increase from the previous year.  Because Microsoft missed estimates by a penny and issued a weak outlook, the stock is down 5%.  While we're on the topic of Microsoft, I'm going to weight in on the Microsoft/Yahoo kerfuffle.  Back when every analyst in America was going on and on about how Microsoft desperately needed to pay upwards of $37 a share for Yahoo, I wrote a skeptical piece.  It was very hard for me to believe that Microsoft did not have the upper hand in negotiations.  After all, Yahoo was trading at $18 a share before Microsoft launched its initial bid that caused Yahoo's stock to rally to $28.  In the interim, talks have fallen apart, resumed, fallen apart again, resumed again,  and fallen apart....again.  So where do they stand now?  Microsoft wants Yahoo's search business, but it has made it perfectly clear that it is not going to pay a penny more than it believes the business is worth.  Yahoo's board is now facing a major uphill battle in an attempt to convince its shareholders that it can extract more value independently.  The market doesn't seem to believe that Yahoo's current board can organically grow the business, as the stock has slumped back down into the low $20's since Microsoft withdrew its bid.  Microsoft's latest blow came when it said it is no longer going to engage in negotiations with Yahoo's current board.  I believe that Yahoo's board will be given the boot by shareholders and Microsoft will claim its prize.  Microsoft may even win Yahoo (either in part or in whole) at a lower price than it originally anticipated.  Why?  Because we're in a bear market, Microsoft has cash and nobody else can afford to offer a counter.  Call me crazy and feel free to mock me if I'm wrong...       

Microsoft Walks, Yahoo Shares Tumble

Microsoft withdrew its bid for Yahoo after negotiations fell apart this weekend. Analysts, who were stunned by the news that Microsoft didn't meet Yahoo's absurd demands for $37 a share, were tripping over themselves to downgrade the stock to a "sell." Regular readers of mockthemarket, however, weren't shocked by this news as I noted in a story on April 28th that Microsoft clearly had the upper hand in negotiations. Growth in Yahoo's search business is lagging Google's by a significant margin. Meanwhile, investors only thought the company was worth $19 a share before Microsoft's bid. $33 a share was a gift to Yahoo's shareholders and Microsoft knew that. It's why Steve Ballmer reiterated in the press several times that he was not going to raise his bid by a substantial amount. Now Jerry Yang has the difficult job of trying to prove to investors that turning Microsoft away was the right thing to do. If Yahoo's future earnings fall short of Yang's somewhat overzealous predictions, Yang may be looking for another job before the end of the year.

Yahoo Ignores Ballmer's Tough Talk

Jerry Yang countered Steve Ballmer's tough talk with silence this weekend, as the deadline to accept Microsoft's bid for Yahoo passed unanswered. Most analysts seem to believe that Microsoft "needs" Yahoo to better compete with Google in the lucrative internet search and advertising business and will raise its bid in order to ensure that the deal is done. The way I see it, Yahoo was an $18 stock before Microsoft's bid, giving it a $25 billion market cap. Microsoft said it would pay $40 billion for the company. If Microsoft pulls its bid, Yahoo will be forced to go it alone in its battle for web dominance against Google, unless, of course some other white knight comes along. Unfortunately, not many strategic buyers are running around with $40 billion handy and problems in the credit markets make a deal this size unlikely for a financial sponsor. Perhaps only Google could digest an acquisition this size. If you ask Sergey and Larry what they think about making a bid for Yahoo they'd probably reply solemnly with: "Too many antitrust issues," before breaking out into hysterics and adding "Are you kidding? We're crushing those guys!" Does Microsoft really need Yahoo or does Yahoo need Microsoft? This question will be answered within the week. I'm betting on the latter. Feel free to mock me if I'm wrong.