Microsoft may raise bid for Yahoo to $34 per share

In the end everyone may be happy. If Citi analyst Mark Mahaney is right, than all that PR work and talk about maximizing investor value may pay off for Yahoo and Microsoft will get Yahoo for about 10% more than it initially intended to pay.

Henry Blodget, one of the most visible analysts during the dotcom boom, posted Mahaney’s notes to investors, which basically provided some reasoning behind Citi’s decision to upgrade Yahoo on Tuesday. While Mahaney does not know for sure that Microsoft will increase its bid to $34, which would mean that the company will be paying about $49 billion for Yahoo, he states that a Microsoft-Yahoo deal is the “most likely outcome” of the current scenario – “at a price likely higher than the initial $31 bid”.

The analyst believes that $34 would be reasonable as this price would reflect 16 times the estimated 2009 EBITDA of Yahoo ($2.2 billion).

Yahoo clearly is in a fantastic negotiation position as many people, not just at Yahoo and Microsoft, believe that Yahoo is must-purchase for Microsoft in its battle with Google. Mahaney noted that Microsoft is unlikely to walk away from the Yahoo bid as the company has yet to gain significant in the online advertising market yet and stop Google’s advances. “No other step could potentially address the scale/liquidity challenge of [Microsoft’s] ad platform,” he wrote.

It appears that there is a certain kind of consensus in the industry that Yahoo will end up with Microsoft, one way or the other. We keep hearing about ongoing negotiations behind doors and Yahoo uses every opportunity it has to show investors and analysts how strong the company is, which really may be just a key part of Yahoo’s negotiation strategy.

Microsoft and Yahoo did not comment on Mahaney’s analyst note.

Yahoo shares closed at $28.73 on Tuesday.


Rate cut sends stocks soaring
Crisis still far from over, analysts warn



Fighting a crisis of confidence, the Federal Reserve kept up its relentless assault against a stubborn credit crunch and a deep economic downturn on Tuesday with another big cut in short-term interest rates.

The three-quarters of a percentage point reduction in its benchmark interest rate was dramatic. But it fell short of the full percentage point financial markets wanted, and analysts warned that the credit crunch, which started in the housing sector, is a long way from over.

Yet the stock market rallied powerfully, signaling at least a temporary improvement in market psychology at an extremely volatile moment. The Dow Jones industrial average shot up 420 points, the largest one-day burst in five years, as investors showed their comfort with the Fed's aggressive actions, including efforts over the weekend to rescue Bear Stearns Cos.

A Wall Street competitor, Lehman Brothers Holdings Inc., provided additional calming news by reporting stronger-than-expected earnings, thus tamping down rumors that it also was in financial peril because of bad bets on mortgage-backed securities.

The nation's central bank, headed by Chairman Ben Bernanke, gave no signal that it was through lowering interest rates. But some economists said the end is growing closer, especially since the Fed expressed some concern about the threat of rising inflation.

The Fed's policymaking arm, the Federal Open Market Committee, voted 8-2 to cut the overnight bank lending rate to 2.25 percent, saying "the outlook for economic activity has weakened further."

It added: "Financial markets remain under considerable stress, and the tightening of the credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters."

Economists said the Fed's latest action, designed to spur economic activity by making borrowing cheaper, would do little good in the short run, and would not keep the economy from sinking into a recession, which many think it has already entered. Tight credit markets will be hard to crack, they said.

Many analysts predict a slow recovery, with sub-par economic growth extending into 2009. Asha Bangalore, an economist at Chicago's Northern Trust Co., said a slow pickup should start in the second half of this year.

"They have been pushing the accelerator hard since last fall and it really isn't gaining much traction," said Lyle Gramley, a former member of the Federal Reserve. "But they have to keep doing everything they can."

Jared Bernstein, economist at the Economic Policy Institute in Washington, said, "I think it will have a muted but positive effect on the economy in general and financial markets in particular."

"It's not a miracle solution, but nothing is a miracle solution," added Nigel Gault, an economist at Global Insight, a consulting firm. "The Fed is trying to do everything it can to encourage lending, but it is battling against a general lack of desire by financial institutions to take on risks."

At 2.25 percent, the Fed's benchmark rate is lower than the current rate of inflation, Wells Fargo economist Scott Anderson noted, and is a "highly accommodative monetary stance" that will help tight-fisted banks raise capital more cheaply and, in the long run, cause them to open their lending spigots.

Bank of America economist Mickey Levy predicted that the Fed will reduce its key interest rate to as low as 1.5 percent before stopping. Lower Fed rates will have a positive impact on adjustable-rate loans, such as home-equity lines of credit, and will add money to the pockets of some consumers. But people with bank certificates of deposit are likely to see lower returns on their savings after they mature.

Gramley, one of those who believe the economy is in a recession, said the tax rebate checks voted by Congress will have a much more powerful short-term impact on the economy than interest-rate cuts. He said Congress will also have to weigh in with a plan to help many Americans who face foreclosure on their homes.

The Fed's decision capped a remarkable period in which the central bank, under fire by many in the financial markets for being too slow to respond to the credit crunch, went on an aggressive streak.

On Sunday, the Fed joined with Treasury Secretary Henry Paulson to engineer a fire sale of troubled Bear Stearns, which was saddled with a huge portfolio of mortgage-backed securities. And, in a crucial decision, Wall Street's largest investment banks were given permission to borrow straight from the central bank, a source of cheap and plentiful capital.

David Jones, chairman of Investors Security Trust in Ft. Myers, Fla., and a former Wall Street economist, said the Fed's interest rate cuts will take a while to work, but added that "we have turned the corner on the potential for a financial meltdown."

Jones said that before the Fed rescue of Bear Stearns Sunday night, he had feared the stock market would plunge as it did at the start of the Great Depression. The Fed's intervention came at the right time, he said, and "it was the moment of truth."

Nonetheless, the Fed showed for the first time in a long time that its decisions are not being totally driven by Wall Street, since it went against market expectations of a full percentage point reduction in interest rates.

"The Fed wanted to remind the market that they are in charge of monetary policy," Anderson said.

But the central bank's statement showed worry over recent price increases. It said inflation was "elevated" and that "uncertainty about the inflation outlook has increased." That concern caused two Fed members, Richard Fisher, president of the Dallas Federal Reserve Bank, and Charles Plosser, president of the Philadelphia Federal Reserve Bank, to cast the two dissenting votes.

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