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Prescient Thoughts on Microsoft and Yahoo!

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New York — Microsoft, which is in NORTH RIVER MANAGEMENT GRADE
freefall, drops a way overpriced bid for Yahoo and my Management Grading System scores another big hit. Yahoo!!!

As with the tech crash of 2001 (which I called) and the recent subprime crisis, Wall Street and the press missed the evident flaws in the deal. I ran the numbers, asked the questions, and got the answers.

Let’s review my North River Course Corrections from early February to see just how easy it was to understand this deal and what it meant.

February 8, 2008

“Is Yahoo worth it? Seems like an obvious question. Microsoft bids a company that gets my NORTH RIVER MANAGEMENT GRADE C to 5.6 times sales and no one asks, ‘How does this work?’ Especially when the data show clearly that it doesn’t.

 “You can see from this chart that the sales multiple Microsoft is offering is a great deal for Yahoo shareholders and they would be nuts not to take it. But for Microsoft shareholders, there are lots better way to spend their money. First of all, Microsoft’s own operations need a drastic overhaul. Second, there is no way that, in its current shape, Microsoft can take on a Grade C operation and expect to make such a deal accretive.

“The data also show that Microsoft is living off its monopoly rents in business operating systems and software. Yahoo is in the opposite position, struggling to survive against Google. The two business models are incompatible and it is unlikely the staff of both can be integrated. This isn’t a Yahoo. It’s a lulu.

“So, let me reiterate what I said earlier this week. If this deal goes through, Microsoft will write off the full value within five years. You can call me on it.” 

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