A couple of years ago I bought some Microsoft (MSFT) stock because I thought it was undervalued. I do freelance technology and analysis work. Back then Microsoft was one of my customers and my analysis of the real competitive situation convinced me investors were wrong, yet again, that Microsoft was about to be destroyed by a rival. I have heard such talk since the early 1980's and so far all rivals have been left in the dust. Google is a standing man, but Google has not been around very long.
Yesterday I thought the stock was very undervalued given the recent earnings growth. But then Microsoft made what could play out to be the stupidest move in its history: a high-ball bid for Yahoo. There were rumors of this weeks ago, which may account for the Microsoft's low stock price leading up to the actual announcement.
I covered the Yahoo (YHOO) conference on Tuesday (See my Yahoo January 29, 2008 analyst conference summary). Yahoo is a good company and profitable, trying to deal with changing Internet culture and heavy competitive pressure from Google (GOOG). But its stock, by my valuation methodology, was overvalued on an absolute basis and especially when compared to the prices of other technology stocks during this liquidity sqeeze.
Now Microsoft proposes to buy Yahoo for even more than its already overvalued price. I think Microsoft would have been much better off just getting out there and competing with Yahoo and Google. Merge in Yahoo and its earnings will become stock valuation at Microsoft's relatively low PE ratio. Combined the two companies are worth less than if kept separate.
In addition, I don't see Microsoft infusing new vigor into Yahoo, or the other way around. Two heads are less than one, in this case.
So I sold me Microsoft stock today. There are better values in the market, both in technology stocks and in other segments. I still think Microsoft is a great company. For its most recent view of itself you can see my Microsoft (MSFT) analyst conference summary of January 24, 2008.
If I'm wrong, so be it. I don't see much reward, and I see a lot of risk, in this merger for Microsoft shareholders. But for Yahoo shareholders it is a great deal.
See also:
http://www.microsoft.com/
http://www.yahoo.com/
http://www.google.com/
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