February 10, 2008

Microsoft could EASILY pay $40/share for Yahoo, in cash

The Microsoft/Yahoo negotiations are underway. Mike Arrington and Henry Blodget are fretting about Microsoft’s stock price decline in reaction to the deal.

It’s all nonsense. According to Microsoft’s 10-K statements, they have $27 billion in cash and equivalents and have $14-17+ billion/year in cash flow from operations. Assume they have to pay $40/share for Yahoo’s 1.4 billion shares in an all-cash deal (meaning they have to borrow around $30 billion). Assume that building out data centers adds a couple of billion of dollars a years in new capital costs. They can still pay all the debt back in three years. It’s all a non-issue, if they think the acquisition is worth it.

So is it? I see tons of synergies, but I’ll confess to not having quantified them. I’m also more optimistic about post-merger execution than many observers are. I do think Microsoft will have to pay up to complete the deal.

And I think Henry Blodget is proposing a false dichotomy when he suggests Microsoft is wrongly favoring ad-supported online software over subscription online software. Ad-supported personal use and subscription-supported enterprise use can co-exist.

EDIT: I forgot about the FAST deal when I wrote this, which will cost a few billion dollars more when it closes. But there was enough slack in the calculations to cover it. Microsoft could indeed pay the debt off over 3-4 years, although it would surely arrange a somewhat longer term for flexibility.

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2 Responses to “Microsoft could EASILY pay $40/share for Yahoo, in cash”

  1. Text Technologies»Blog Archive » A game theorist’s view of Microsoft/Yahoo on February 12th, 2008 11:07 am

    […] Edit:  Microsoft/Yahoo could easily end up being an all-cash deal. […]

  2. Text Technologies»Blog Archive » Yahoo indeed seems to want an all cash deal on April 7th, 2008 9:17 am

    […] It’s hard to imagine what the former could mean other than “Please make an all-cash offer (or, better yet, go away).” But I previously noted, Microsoft can indeed afford to buy Yahoo entirely for cash. […]

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