Microsoft can raise Yahoo bid 'by 10 percent'

Microsoft may find it has some leeway in increasing its Yahoo bid by 10 percent without spooking its investors, one Wall Street analyst notes in a research report released yesterday.

Brent Thill, an analyst at Citigroup Global Markets, surmises in his research report that Microsoft's share price already reflects a possible 10 percent increase for its initial stock-cash buyout offer of Yahoo for US$31 a share.

"We think Microsoft's stock embeds a potential 10 percent increase in the bid price; anything greater may create additional pressure on the shares," Thill says in the report. "We continue to believe a US$34 offer would be a reasonable, valuation-supported base case for Yahoo."

Since Microsoft announced its unsolicited buyout bid on 1 February, its share price has fallen 11 percent, while the Nasdaq has dipped only two percent.

Microsoft investors, Thill notes, apparently are focused only on the Yahoo transaction and are ignoring strong underlying fundamentals of the Redmond giant, as it gears up to report its fiscal third quarter next Thursday.

Wall Street expects Microsoft to post third-quarter earnings of 44 cents per share on revenue of nearly US$14.5 billion, according to Thomson Financial.

But Thill expects the software giant to beat Wall Street's estimates for both earnings and revenues for the quarter. He anticipates that Microsoft will earn 45 cents a share on revenue of $14.6 billion.

Some of the issues driving this bullish assessment include a continuation of a strong product cycle and reduction in piracy -- two things that aided its performance in the previous two quarters, as well as seasonally stronger PC shipments and upbeat forecasts from IBM and Intel on worldwide demand.

The latter hardware forecasts are expected to help drive software sales for Microsoft.

Microsoft's attempt to acquire Yahoo is expensive, but there could be a significant other expense for the software maker: retention bonuses.

Microsoft Chief Executive Steve Ballmer publicly discussed these payments to keep Yahoo employees from leaving, saying that "we intend to offer significant retention packages to your engineers, key leaders, and employees across all disciplines." But The New York Times on Wednesday dug out a number that puts the retention bonus factor into perspective.

Specifically, the paper said Microsoft's acquisition of Tellme Networks, a deal valued at about US$800 million, was supplemented by a further US$100 million to retain employees.

There are major cultural and technology differences between Yahoo and Microsoft that would complicate integration and make retention bonuses more necessary. But Tellme Networks chief executive Mike McCue said Ballmer had become sensitive to at least one technology aspect of integration.

When McCue asked whether Tellme would have to move its software from Sun Microsystems' Solaris version of Unix to Windows, Ballmer replied, "No, no, we've learned our lesson," McCue recounted to the Times. That could be a reference to the long and arduous transition of Hotmail from FreeBSD Unix to Windows after Microsoft acquired the e-mail service.

That could be music to Yahoo ears, since the company uses open source software extensively rather than Microsoft's products.