Microsoft's price for Yahoo loses value in week since offer

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Microsoft may end up having to raise the amount it is willing to pay for Yahoo if the software company's stock continues to drop while Yahoo's continues to rise.

In the week since Microsoft made its surprise bid for Yahoo, the price Microsoft is willing to offer the Internet company has dropped by nearly 7 percent as Microsoft's share price has fallen. In the meantime, Yahoo's shares have risen in value, trading at nearly the $31 per share Microsoft was willing to pay, making the company potentially worth a higher asking price and the offer vulnerable to higher bids.

Microsoft announced its offer to acquire Yahoo on Feb. 1, saying it would pay $31 for half of Yahoo's outstanding shares and 0.9509 of a Microsoft share for the other half. Microsoft's half cash/half stock offer to Yahoo was valued at about $44.6 billion at the time it was made.

The stock half was based on the $32.60 Microsoft share price at the end of Thursday, the day before the deal was announced last Friday. Yahoo's share price at the close of market on Jan. 31 was $19.18. The cash half of the deal was $22.3 billion, which, when considering Microsoft agreed to pay $31 per share, is based on half of Yahoo's outstanding shares being 719,354,838.

Microsoft has not publicly said what number of outstanding shares it has based its offer price on. In its form 10-Q filed Nov. 9, 2007, Yahoo's outstanding shares as of Oct. 31, 2007, were 1,336,444,034. However, cutting that number in half and multiplying it by Microsoft's $31 per-share offer adds up to $20.7 billion, not the $22.3 billion in cash Microsoft is offering.

By Friday afternoon, Microsoft's share price was down about 12 percent at $28.4. Based on that price and assuming that 719,354,838 is the other half of Yahoo's outstanding shares -- and then factoring in the $22.3 billion cash offer -- the amount of the bid stands at $41.7 billion.

Microsoft's stock is likely down due to its offer for a number of reasons, said a financial analyst who was interviewed Friday and asked not to be named. Investors may not be happy with the money Microsoft is willing to pay for Yahoo, and strategic questions surrounding how the companies will pull off a merger successfully also are driving the stock down.

Moreover, the deal is expected to dilute Microsoft's earnings in fiscal 2009 and perhaps even in fiscal 2010, so the company's earnings predictions likely will come down, the analyst said.

On the other hand, Yahoo's stock has been buoyed by speculation there could be other, higher bidders, for the company now that Microsoft has shown its hand. Yahoo stock has risen nearly 34 percent since the deal was announced; on Friday afternoon it was trading at nearly $29, which is only slightly lower than the current per-share for the stock half of Microsoft's offer.

Microsoft has declined to comment about whether it will adjust its offer so the final amount of the deal will be the original $44.6 billion offered. The cash half for the time being remains the same, sources close to the company said Friday. However, this could change in last-minute dealings if Microsoft's stock continues to lose value while Yahoo's rises, and other companies offer competitive bids for Yahoo in the meantime.

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