Sandeep Aggarwal (pictured) leaves no stone unturned in his analysis of Microsoft Corp.'s [MSFT] pursuit of Yahoo! Inc. [YHOO] in a research report he put out Wednesday for Collins Stewart. Aggarwal, who was previously the Internet analyst at Oppenheimer, assigns a 90%-plus probability to Microsoft acquiring Yahoo! and that it is "very likely" that the price will be higher than the $31 a share cash-and-stock offer Microsoft originally made Feb. 1.
A la David Letterman, Aggarwal publishes a Top 10 questions list relating to the deal. We won't go through all 10 of them (a couple are actually answered in the above paragraph), but some of the more relevant ones. Foremost, Aggarwal believes that Microsoft will likely pay $33.50 per share in cash and stock for Yahoo!, or 10% more than its current offer. He writes that he does not think Microsoft is willing to pay "materially higher" than its original offer, especially considering the economic outlook and its current share price. He assigns less than a 10% chance the deal gets done above $33.50.
Aggarwal assigns a 55% probability to a deal getting done amicably (that means a 45% chance of a hostile deal, for those among the math-challenged). Depending on which of those scenarios comes to fruition, he would expect a resolution by the end of April or mid-May (in an amicable deal), or in the case of an unfriendly deal, he predicted Microsoft would start a proxy war by the end of April with the hopes of getting its candidates on Yahoo!'s board by July. In both scenarios Aggarwal expects regulatory approvals to take up to three quarters.
As for potential alternatives, Aggarwal writes that Yahoo! has "explored and largely exhausted most of them if not all." He discounts a partnership with Google Inc. [GOOG] because of regulatory and operational challenges, and argues that the company was unable to garner the magnitude of support it expected from investors to pursue a higher valuation from Microsoft.
Aggarwal also tackles Yahoo!'s first-quarter report April 22, writing that at best the company will have an in-line quarter while raising guidance for the remainder of the year. He notes concern about Yahoo!'s exposure to the financial services sector through its Yahoo! Finance site and could suffer as online budgets are slashed by mortgage, credit card and other companies impacted by the credit crunch.
Finally, Aggarwal looks at potential synergies of a potential Microsoft-Yahoo! merger and concludes the combo would have cost synergies of a robust $1.3 billion. He places a buy rating on Yahoo!'s stock with a price target of $33.50. - David Shabelman
techconfidential.com
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