News Corp. and Yahoo? Hopefully Not Sovereign Bancorp/Santander All Over Again

This is so typical. Yahoo!, in the absence of any real defense, may be seeking to leap into the arms of a white knight, in this case the mighty News Corporation (NWS). But no, NWS isn't offering $35 a share or even $32 a share for 100% of the stock - apparently the discussions are centering around securing a ~20% stake in Yahoo! partially through monetizing its stake in MySpace, reportedly at almost-Facebookian levels of $6-$10 billion. And then there might be a little cash tossed in by a private equity partner, call it $15 billion. Now it doesn't take a rocket scientist to figure out what's in this for Yahoo! management and NWS: one group of people get to keep their jobs and their "independence" (just like those at the Wall Street Journal - yeah, right), while the other gets access to a behemoth in display advertising and, oh, the ability to mark those MySpace shares to market. Not a bad outcome for a company under siege and a company dying to see its Internet acquisition prowess validated in a concrete way.

But what about Yahoo! shareholders? Is this really the best deal for them? If this deal was so great, and it has been bandied about for some 18 months, why is it now so terrific? Because NWS gets what it wants and Yahoo! management gets to claim victory? Who cares. It's about the shareholders. I am only interested if the REAL value of the deal to Yahoo! shareholders exceeds Microsoft's very real offer of $31 per share. I haven't run one number and clearly a formal NWS/Yahoo! deal hasn't be announced so I'm using gut and judgment, but my guess is that it is hard to get there without some typical pie-in-the-sky assumptions. $31 a share versus - what? Promises, plans, hopes and dreams. If I am Microsoft I am giggling slightly at this turn of events and taking the offer directly to Yahoo! shareholders. Because this sale-of-a-stub to maintain independence garbage has some precedence, with disastrous effects for the target's shareholders.

Anyone remember Sovereign Bancorp vs. Relational Investors, with Banco Santander coming in as a white night? Here is the backdrop from the Business Law Prof Blog in November 2005:

Sovereign Bancorp, the nation’s third largest savings and loan, has been under attack from its biggest shareholder, Relational Investors, since last May.  Relational is upset because it believes Sovereign’s stock is underperforming and blames this on Sovereign’s CEO, Jay Sidhu, and its conflicted board.  Last month, Relational launched a proxy fight to replace two board members.  A few days later, Sovereign announced it was acquiring Independence Community Bank, a regional thrift, for $3.6 billion.  To finance the deal, Sovereign is going to sell Sovereign shares equal to a 19.8% stake to Spanish bank Santander.  The deal will thus dilute down the ownership percentage of current Sovereign shareholders, including Relational, and will make Santander, who is presumed to view current Sovereign management favorably, Sovereign’s biggest shareholder.  Because Sovereign is buying Independence for cash and issuing less than a 20% stake to Santander, Sovereign maintains that no shareholder approval is required.  Relational asserts that Sovereign is overpaying for Independence and that Sovereign’s prime motivation for doing the deal is to thwart Relational.

Bottom line, the Santander deal went through at egregious terms for the acquirer, the shareholder-value champion Relational was snubbed and Sovereign stock was dead money until January 2007, at which point it began a downward march that has left it almost 60% lower nary one year later. This is what I do not want to see happen to Yahoo! shareholders. If NWS gets terms similar to Santander, which sharply curtail Sovereign's ability to sell itself to the highest bidder, Yahoo! will have effectively issued a massive call option to NWS, the value of which accrues to entrenched Yahoo! management (and NWS), certainly not company shareholders. And that would be just plain wrong.

Is this the way it will play out? Hopefully not. What I'd like to see happen from a Yahoo! shareholder perspective is for Microsoft to go hostile and take its offer directly to Yahoo! shareholders. At that point we'll really see where investors think the value lies. Given Yahoo! management's performance and the possibility of a questionable deal (from a valuation perspective) from NWS, are existing investors really going to look Microsoft in the eye and say "no thanks?" No way. Bill Miller is talking tough, but at the end of the day he is a rational man and a fine investor. Were I him I'd have made similar comments to try and get Microsoft to increase their offer. But given Yahoo!'s bumbling of the situation the only way that offer is going higher is out of sheer pity. Because it is the best deal in town, to be sure.

Comments

[John McLaughlin]

Great insight into Yahoo's latest stumble. At what point will management realize that their objective is to maximize shareholder value above all else? I'm with you and hope that MSFT is able to get this deal pushed through by going directly to the shareholders if necessary.

One technical note...wouldn't Yahoo's NWS strategy be considered a white squire tactic and not a white knight one? I say this because it is a minority sale to NWS and not an outright acquisition.