Microsoft results disappoint but bid for Yahoo stays firm
Microsoft Corp. reported lackluster quarterly results Thursday that sent its shares down 5% in after-hours trading, and the company suggested it was still unlikely to offer more money to acquire Yahoo Inc.
Microsoft’s shares tumbled to $30.20 after the earnings report, down from a close of $31.80 and off 7.4% from their price on Jan. 31, the day before Microsoft announced its unsolicited Yahoo bid.
Microsoft’s half-cash, half-stock offer of $31 a share was worth $44.6 billion at the time. But the deal’s value has fallen with the software giant’s stock price.
Still, Microsoft Chief Financial Officer Chris Liddell on Wednesday rejected Yahoo’s frequent claim that the offer undervalued it. He called the bid “extremely generous” given Yahoo’s declining share of the market for online advertising.
Redmond, Wash.-based Microsoft threatened three weeks ago to nominate its own slate of directors for Yahoo’s board and possibly lower the offer price if no deal came together by Saturday. During a conference call to discuss the quarter’s results, Liddell gave Yahoo wiggle room by calling only for “progress toward an agreement by this weekend.”
Otherwise, Liddell said, “we will reconsider our options,” which he said included mounting the proxy fight for board control and withdrawing completely. Any announcement would come next week.
Analysts and people involved in the process said they expected Microsoft to press on with a proxy battle, rather than walk away or cut its price, if Yahoo didn’t engage in more serious negotiations.
“These guys are going to push ahead with their board of directors,” RBC Capital Markets analyst Robert Breza said. “I would expect them to use all the resources that they can.”
Instead of raising the price to seal the deal, Breza said, Microsoft might be willing to make its offer all cash so the Yahoo board could “save face.”
Sunnyvale, Calif.-based Yahoo has been seeking alternative deals, including a search-advertising arrangement with chief rival Google Inc. and an investment by Time Warner Inc. that would combine Yahoo with Time Warner’s AOL.
Microsoft exceeded its earlier projections for operating income in the fiscal third quarter, as it usually does. But net income dropped 11% to $4.39 billion, or 47 cents a share, from $4.93 billion, or 50 cents, a year earlier. Revenue edged up to $14.45 billion from $14.4 billion.
Microsoft couldn’t match the strong showing of the same quarter last year, when it launched Windows Vista, its first new operating system for personal computers in six years.
But Vista sales slipped more than many analysts expected. The division that distributes Windows saw revenue decline 24% to $4.03 billion, while operating profit fell 26% to $3.1 billion.
Enough customers have said they prefer the previous operating system, Windows XP, that Microsoft has extended the time it will offer support for the software. Some manufacturers are touting a “downgrade” offer for buyers of Vista computers who want to switch back to XP.
“Vista is underwhelming,” said analyst Charles Di Bona of Sanford C. Bernstein & Co. “But I think it’s still going to have plenty of legs. It doesn’t have to be anything heroic to have a decent product cycle.”
The division behind Microsoft’s other cash cow, the Office productivity suite, reported declines of 2% in sales, to $4.75 billion, and 8% in profit, to $3.14 billion.
Online services, which would be combined with Yahoo, continued to struggle, losing $228 million. The Xbox-making entertainment and devices division swung to an $89-million profit.
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