Yahoo stock takes a beating after deal collapses

SAN FRANCISCO – Yahoo Inc. shareholders reacted with shock and dismay after merger talks with Microsoft Corp. collapsed over the weekend, sending shares tumbling in early trading today.

Before the opening bell, Wall Street analysts cut ratings and price targets after the Sunnyvale, Calif., company rejected Microsoft’s offer. Yahoo’s stock began trading today at $23.02, down nearly 20% from Friday’s close and far below the last-ditch bid of $33 a share that Microsoft said it made Saturday before walking away. Yahoo shares recovered to close down, $4.30, or 15%, at $24.37.

The plunge sent a clear message about investor sentiment about Yahoo’s prospects as a stand-alone company.

William Morrison, an analyst with ThinkPanmure, said the decision to rebuff Microsoft could go down in history as “one of the most destructive decisions for shareholder value in the history of Internet stocks.” He estimates the fair value of Yahoo shares at $20.

After a three-month stand-off with Microsoft, Yahoo co-founder and Chief Executive Jerry Yang is under growing pressure to convince investors that his company is worth more than what Microsoft offered.

“With Microsoft’s withdrawal, we’ll be better able to focus our energy on growing our industry leadership and maximizing value for stockholders,” Yang wrote in a post, called ”OK, so now what,” on the company’s blog late Sunday.

Yahoo management was emboldened in its quest to stay independent by the success of a two-week test late last month in which Yahoo carried online search advertising from Google Inc. Yahoo is banking on a broader search advertising pact with Google, which earns 60% to 70% more for the average search than Yahoo does, in coming days. Such a deal would probably draw intense regulatory scrutiny.

Yahoo also has been in talks with Time Warner Inc.’s AOL in a deal that would give Time Warner roughly a 20% stake in Yahoo. But Microsoft’s withdrawal could change those talks, with Microsoft emerging as a possible suitor for AOL.

Microsoft shares fell 16 cents, or 0.6%, to $29.08. Google gained $13.61, or 2.3%, to $594.90.

Yang also will have to prove that Yahoo can reverse skepticism from Wall Street, which has grown impatient as the company has failed to focus and execute in recent years. In the meantime, search leader Google continues to dominate the lucrative online advertising market.

Microsoft made an unsolicited bid of $31 a share for Yahoo on Jan. 31, when Yahoo was trading at $19.18. Yahoo resisted, saying the bid “substantially” undervalued the company.

The two companies held infrequent discussions. Microsoft Chief Executive Steve Ballmer began to get cold feet a few weeks ago but made a last-ditch effort over the weekend to cut a deal. He and another Microsoft executive met in Seattle with Yang and Yahoo co-founder David Filo. Yang and Filo said they would be open to a $37-a-share offer despite their personal feelings that $38 would be more fair.

Ballmer later called Yang to tell him he was withdrawing the bid. Shareholders wanted a deal in the $34 to $35 range.

Yahoo’s management team was “elated,” a person close to the team said Sunday.

“The board took its mission very seriously,” Yang wrote in the blog post. “We clearly indicated to Microsoft that we were open to a transaction but only if it were on terms that fully recognized the value of Yahoo! and was in the best interests of our stockholders. No one is celebrating about the outcome of these past three months … and no one should.”

Soleil Securities analyst Laura Martin advised selling the stock, saying Microsoft had walked away for good, leaving behind a company that would suffer from increased employee defections and a barrage of shareholder lawsuits in a weakening economy that would undermine the strength of the advertising market.

“Serious execution issues remain,” she said.

Citi Investment Research analyst Mark Mahaney said he expected the stock to trade down but not to the depths of late January, when Microsoft made its bid. He noted that the major stock indexes have risen more than 3% since then, strategic options such as a partnership with Google or AOL have emerged and some investors still hope that Yahoo remains in play – with Microsoft or a new bidder such as News Corp.

Dissident Yahoo shareholder Eric Jackson said Sunday that he planned to rally shareholders to withhold their votes from all Yahoo directors at the company’s annual meeting, which has not yet been scheduled. Jackson leads a group of about 140 shareholders who together own 2 million Yahoo shares.

Such threats could mean a bumpy ride ahead for Yahoo’s board and management. Analysts expect a barrage of lawsuits in coming weeks. Shareholder pressure could still force Yahoo back to the negotiating table with Microsoft. That was the tactic employed by Oracle Corp. last year in its ultimately successful bid for BEA Systems Inc.

Yang will have to make something happen fast to prove to shareholders that Microsoft undervalued Yahoo. His argument: Yahoo has gotten leaner, more focused and better able to execute. He points to recent quarterly earnings, which beat analyst estimates by a little, as a sign that Yahoo is on the right path.

 jessica.guynn@latimes.com