Technology giants' investors suddenly have lot to think about
Investors in Yahoo, Microsoft and Google, arguably three of the most important technology stocks, just got 45 billion reasons to think.
Microsoft's $44.6 billion bid Friday for Yahoo, in the biggest combination ever of two technology companies, shakes up the Internet's balance of power as the medium matures into a business with a few dominant players.
The bid, which must still be approved by Yahoo and regulators, sets up an escalated battle between Microsoft and Internet wunderkind Google, as well as a dilemma for investors.
"It's game on between Microsoft and Google," says Colin Gillis, Internet analyst at Canaccord Adams.
While the deal's approval could take months, investors are already handicapping what to do with their shares in each, including:
- Yahoo. Investors frustrated with Yahoo's sagging fortunes have the easiest decision: cash in, says Bill McVail, portfolio manager at Turner Investment Partners. Shares of Yahoo jumped $9.20, or 48 percent, to $28.38 Friday on the news.
While the stock could still creep up to the offer price, given the risks the deal faces, "it's hard to not" just sell Yahoo and take the cash, says Rob Sanderson of American Technology Research.
- Microsoft. The software giant quickly becomes a significant challenger to Google, and existing investors should hang on, says Steve Neimeth, portfolio manager at AIG SunAmerica.
Neimeth says Microsoft's $31-a-share bid is reasonable, given Yahoo's dominance. The combined company would be visited by 86 percent of U.S. Internet users, says Nielsen Online.
Microsoft is also taking advantage of Yahoo's stock weakness. Prior to Friday's gain on the news, Yahoo stock was 38 percent lower than it was at the end of last February, following a prior failed buyout discussion between the two companies.
The initial reaction on Wall Street suggested some concern that Microsoft is overpaying. Microsoft's offer values Yahoo at 66 times how much the company earned in 2007. Google's stock price values it at 39 times its 2007 earnings. Microsoft stock fell $2.15, or 6.6 percent, to $30.45. Typically, an acquirer's stock falls 2 percent, says James Owers, finance professor at Georgia State University. "There's a perception this offer is over the top," he says.
- Google. The deal further tests Google shareholders' patience. The stock is down 25 percent this year, as investors worry that growth in the company's Internet search business is slowing.
Even so, Google shareholders should hold on since the company remains the leader and Microsoft will be distracted absorbing Yahoo for months, McVail says. "Google is still in a good spot," he says.
WBJ Web Partners
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