Wall Street Comments on "Surprise" Move By Microsoft To Drop Yahoo! Bid (MSFT, YHOO)

May 5, 2008 12:33 PM EDT

As would be expected, Wall Street is out in force commenting on this weekend's surprise news that Microsoft (Nasdaq: MSFT) has dropped its bid for Yahoo! (Nasdaq: YHOO). The street is overwhelmingly negative on Yahoo! following the news.

YHOO Ratings Changes:
Citi downgrades from Buy to Sell with a $26 price target.
ThinkPanmure downgrades from Accumulate to Sell, price target cut to $20
Jackson Securities downgrades from Hold to Sell
Soleil Securities downgrades from Hold to Sell
Collins Stewart downgrades from Buy to Sell, $23 price target.

YHOO Ratings Maintained:
Sanford C. Bernstein lowers its price target from $31 to $25, maintaining a Market Perform rating
Piper Jaffray lowers its price target from $31 to $23, maintaining a Neutral rating.
Stifel Nicolaus maintains its Hold rating.
JPMorgan maintains its Overweight rating.
Needham maintains its Hold rating.
Goldman Sachs reinstates a Neutral rating and $26 price target.
Susquehanna maintains its Neutral rating.
Deutsche Bank maintains its Hold rating, $17 price target.

Below are some select comments on the developments:

Soleil Securities: "firm believes this weekend's move by Microsoft to walk away from Yahoo! is not "a tactic Microsoft is using to get a lower price." Soleil also points out that "Yahoo!'s prioritization of employees over shareholders in handing Microsoft should engender no loyalty from Wall St. and we expect Yahoo!'s employee turnover to accelerate as its share price falls and stock options are underwater."

Deutsche Bank: "With MSFT surprisingly having pulled its bid to acquire Yahoo! (even after a raise to
$33/share), we expect Yahoo! to trade back to pre-bid levels, or into the upper teens. It is now back to business at Yahoo!, yet the online advertising market has slowed (single-digit organic display ad growth in 1Q at Yahoo!), the easy RPS gains in search have already played out, key execs have departed & US
traffic growth still looks to be on the decline."

Piper Jaffray: "While Microsoft has seemingly ended its quest for Yahoo!, we believe there is still about a 30% chance that Yahoo and Microsoft come back to the table. Excluding a possible MSFT return, we believe Yahoo! will make some imminent move(s) to increase value, which could include a Google outsource and/or other combination with AOL/News Corp.

DA Davidson: "We suspect this may not be the end of the acquisition talks. With YHOO trading down significantly today, its management may be forced back to the bargaining table by disgruntled shareholders putting MSFT in a position of strength. If not near-term, MSFT may also have a chance to pursue another bid if YHOO fails to live up to the optimistic growth projections management laid out for 2009 and 2010."

Jackson Securities: "We believe that shareholders should sell their stock in Yahoo! as the company will not only face numerous lawsuits but intensifying competition from competitors. The lawsuits are likely to decrease EPS throughout the second half of year, eating away at the cash the company has on hand."

Susquehanna: "Although Microsoft has decided to abandon its acquisition of YHOO, we expect Yahoo! to continue its discussions with Google, AOL, MySpace and others as Yahoo! looks to enhance its positioning in the Internet advertising market. The most likely scenario, in our view, is an outsourcing agreement for a segment, not all, of its search business to Google, which we view as a major beneficiary of Microsoft's dropped YHOO bid."

S&P Equity Research: "Although we now expect YHOO to quickly pursue new actions to try to generate shareholder value, such as an expanded search advertising pact with Google (Nasdaq: GOOG) and/or buyback activity, we expect the shares to be under pressure today"

Citi: "three most likely scenarios for YHOO now. 1) Back To Business As Usual: With '08 remaining another major investment year and the company likely a sustainable low-double digit EBITDA grower warranting a Media Multiple - 45% probability/$22 Stock = 8X '09 EBITDA; 2) Major Strategic Alternative: Google (Nasdaq: GOOG) Search Outsourcing, AOL or MySpace Partnership, Asia Asset Sale & Substantial Buyback - 40% probability/$26 Stock - biggest upside is likely Google Outsource, which could add $1B+ in cashflow worth $6 per share to YHOO; & 3) MSFT-YHOO Deal Happens: 7% solution found and deal happens at $35 -- 15% probability/$35 Stock."

Collins Stewart: "YHOO is worth significantly lower in the absence of a MSFT acquisition offer. 2) Increasing competitive pressure from Google and others. 3) Current growth materially lower than overall Internet ad growth. 4) Limited traction internationally. 5) Mass talent attrition. 6) Execution risk with recent M&As. 7) Future business strategy not fully firmed-up."

[LJ]

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• Piper Jaffray
• Stifel Nicolaus
• Deutsche Bank
• JPMorgan
• Goldman Sachs
• S&P Equity Research
• Citi
• Needham & Co
• Soleil Securities
• Sanford C. Bernstein
• D.A. Davidson
• Collins Stewart
• Scopia Capital

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