Yahoo! was founded in 1994 by Stanford Ph.d. students Devid Filo and Jerry Yang, and incorporated in 1995. The company’s offerings to users fall into five categories: Search, communications and communities, media, connected life. Microsoft was incorporated in 1981. Its business includes five major segments: Client, Server and Tools, Online Service Business, Microsoft business division, entertainment and devices division.
On February 1st 2008, Microsoft initiated the bid for Yahoo! by bear hug. The offer represents a 62 percent premium above the closing price of Yahoo! common stock on Jan. 31, 2008. It is controversial to define whether the deal is a hostile takeover or not. The fact is ...view middle of the document...
Second, the combination enables synergies related to scale economics of the advertising platform, which can help to rival Google.
The following graph shows both Microsoft’s daily stock price and Yahoo!’s daily stock price from September 4th 2007 till 1 day before the deal announcement.
From this graph, we can tell Yahoo!’s stock price declined from above $30 in Oct 2007 all the way down to $19.1 on 31 Jan, 2008. (Contrary to Yahoo!, Microsoft’s share price shows a detour but generally an upward curve, from $ 29 in 2007 Sep to $32 in 2008 Jan). Firstly, the decline of the stock price of Yahoo! made the acquisition less expensive for Microsoft. There is an overvaluation of Microsoft and an undervaluation of Yahoo!. Microsoft’s bid is to use the overpriced Microsoft stock to exchange for the underpriced Yahoo! stock. Microsoft might benefit from the market to supplement funding for the proposed acquisition. Secondly, the decline of the stock price also might imply the problem of Yahoo’s operation and worse expectations and less confidence of its shareholders. Microsoft announcing its acquisition proposal at this time was more easily to get the shareholders persuaded and made this deal done.
Abnormal return (market-adjusted returns) on Feb 1, 2008 -8.2% 46.36%.
Average trading volume in Jan 2008 93,002,548 38,910,582
Trading volume on Feb 1, 2008 291,147,044 438,427,577
On February 1st, 2008, the Abnormal return of Microsoft was (-0.065957- 0.016011) =-8.19% while the Abnormal return of Yahoo! was (0.479666- 0.016011) =46.36%. The Average trading volumes (January 2008) of Microsoft was 93002548 and Trading volumes on Feb, 1 was 291147044, while Average trading volumes (January 2008) of Yahoo! was 38910582 and Trading volumes on Feb, 1 was 438427577. It is noticeable that Yahoo! has 46.36% abnormal return on the announcement date, compare to negative abnormal return of Microsoft, both co trading volumes soars, with Yahoo!’s trading volume increased more than ten times. Comparing the data, we can find that the trading volumes increased significantly on the announcement date for both Microsoft and Yahoo!. The different direction of price movement of Microsoft and Yahoo! reflect market’s perspective upon company’s prospects. In other words, Yahoo!’s up pricing indicates that the market is in favored of Microsoft taking over Yahoo!, the acquisition may leverage Yahoo’s assets and resource in the future. Arbitragers try to gain the premium between offer price and current price when the deal is completed in the future. Microsoft price dropping might be considered as market doesn’t like the bidding price that much or there still concerns about the synergy and economic benefits that Microsoft may have from the acquisition. Besides above, among all the large size of trading, we might not rule out the significant amount exchange of shares are motivated by the high premium take-over-price.
Not like the stockholders, debt...