Microsoft, Yahoo Deal Hopefully on Fast Track

I can't blame Microsoft (MSFT) for getting a little impatient with the top brass over at Yahoo (YHOO). Now that Microsoft has set a three-week deadline for making some progress (in a letter sent out this weekend), hopefully this whole thing will be concluded shortly.

For some reason, Yahoo seems to think they have leverage here. Their stock was in the teens, their business was deteriorating, they got a $31 per share buyout offer, and yet they are still quacking that MSFT should raise their offer. With no competing bids? Why would Steve Ballmer do that?

Yahoo should be thrilled that Microsoft is so keen on doing a deal. Deals with 60% premiums aren't really open for renegotiation when there are no other interested parties, and this fact will force Yahoo's hand.

Yahoo should simply come to the table and tell Microsoft that they'll agree to sell, but that they will take no less than $31 per share in real economic value (MSFT is offering half stock, so the actual price is below $31 right now). Either MSFT offers 100% cash or they increase the share exchange ratio to ensure Yahoo shareholders actually get $31, not $28 or $29. Come on everyone, let's get this done already.

Full Disclosure: Long both MSFT and YHOO at the time of writing

Expedia-Google Deal Seems Very Unlikely

Shares of online travel site Expedia (EXPE) have rallied about 15% this week on rumors of a buyout offer forthcoming, perhaps from Google (GOOG). I don't own EXPE, but if I did, a buyout offer from Google is not something I would place a very high probability on.

Thus far, of the many acquisitions Google has made, the vast majority have focused on their core business of advertising, not e-commerce. Sure, Google could buy a site like Expedia and create a very impressive (and likely popular) travel portal from which it could generate both ad revenue and transaction fees. For those investors who want Google to expand the number of ways the search giant makes money, generating fees from e-commerce transactions, as well as advertising such offers, would go a long way in diversifying the company's profit center.

That said, Google has not shown enough interest in doing so for us to think this is going to be part of their growth plan in the short term. While I think buying a site like Expedia would be a good move for Google, I don't think an offer is forthcoming, and therefore EXPE shareholders should consider their investment options with such rumors at the forefront of traders' minds at the moment.

Full Disclosure: Long shares of GOOG, no position in EXPE at the time of writing

One Reason Apple Might Be Hoarding $18 Billion

Today I'm watching the NCAA tournament and trying to lower the stack of unread magazines on my desk. In the March 17th issue of Fortune I came across an interesting article about Apple (AAPL) and CEO Steve Jobs. Some investors in Apple have been disappointed that the company refuses to return any of its $18 billion war chest to shareholders in the form of stock buybacks or dividend payouts. Why haven't they, you might wonder?

Well, when asked how he plans on managing through the economic downturn, here is what Jobs told Fortune:

"We've had one of these before, when the dot-com bubble burst. What I told our company was that we were just going to invest our way through the downturn, that we weren't going to lay people off, that we'd taken a tremendous amount of effort to get them into Apple in the first place - the last thing we were going to do is lay them off. And we were going to keep funding. In fact we were going to up our R&D so that we would be ahead of our competitors when the downturn was over. And that's exactly what we did. And it worked. And that's exactly what we'll do this time."

Interpretation: Don't expect massive buybacks or dividends. Sure, it would be tough for Apple to invest the entire $18 billion even under this mindset, but after the company had cash issues back in the 1990's when they were struggling, Jobs clearly wants to overly cushion the company for whatever the future brings. It makes sense long term, but clearly in the short term investors will be disappointed with the decision to sacrifice short term stock price gains for long term flexibility and stability.

Full Disclosure: Long shares of Apple at the time of writing

Motorola Valuation - Part 1

Following up on my initial Motorola (MOT) post yesterday, here are my numbers on the company's networking and mobility (non cell phone) segment. With MOT shares languishing near multi-year lows at nine dollars, doing individual valuations on both segments that will be spun off next year can help us figure out if there is much downside left in the stock.

My calculation is meant to be realistic, rather than overly conservative or aggressive. I get to about $8 per share for Motorola's non cell phone business, which just shows you how little faith Wall Street has in the cell phone segment right now. Let me know if you think tweaks in my numbers are warranted.

Full Disclosure: No position in MOT at the time of writing

Are Motorola Shares a Bargain at Nine Bucks?

I haven't considered Motorola (MOT) a viable investment opportunity for a long time, mainly due to the overly competitive market environment for the company's core cell phone business. Not too long ago Nokia (NOK) and Motorola dominated the cell phone market and both stocks did well.

In recent years, however, the market landscape has changed. Smart phones like the Blackberry, iPhone, and Treo have taken share. A slew of Asian manufacturers have also played a role, with Samsung, LG, and Sanyo selling far more phones in the U.S. than they ever have before. As a result, MOT has seen cell phone share sag, profits plummet, and a stock price of about $9, down 65% over the last two years.

With the help of activist shareholder Carl Icahn, Motorola has been persuaded to split up the company. The cell phone business is bleeding red, distracting investors from the company's profitable home and enterprise broadband and mobility divisions. In 2007, the cell phone business lost $1 billion on sales of $19 billion. The other business lines (cable modems, set top boxes, etc) actually earned $1.9 billion on revenue of $18 billion. Few people probably realize that cell phones are only half of the story at Motorola. Perhaps a spin off will help with that.

Down around $9 per share, I couldn't help but want to take another look at the stock. Along with a market value now of only $22 billion, MOT actually has net cash of more than $4 billion, or about $2 per share. I'll share some of my numbers with everyone in coming days, but until then feel free to share your thoughts on Motorola as a value play down here in the single digits.

Full Disclosure: No positions in the companies mentioned at the time of writing

Browsing the Sale Rack for Technology

One of the great things about blogging about the market is that while I can't possibly buy every stock that looks attractive, I can post some ideas online and readers can make money if any of them spark their interest. With the technology sector among the worst performers so far in 2008, I thought I would present six stocks that look awfully cheap for long term investors who have no problem waiting out current economic conditions. All of these names have extraordinarily strong balance sheets, so there is even more value than the P/E ratios indicate. Feel free to make the case for any favorites you may have on this list.

Full Disclosure: Long DELL and MSFT but like the entire list to some degree

Yahoo Says "No Thanks" To Microsoft, For Now

Despite having little in the way of leverage over Microsoft (MSFT), Yahoo (YHOO) rejected the software giant's $31 per share bid, deeming it inadequate. With no clear opposing bidders at this point, most industry sources simply think Yahoo will try its best to drum up interest from other parties, or at least that perception, in order to get a little more money out of Microsoft. Since the $31 offer is half stock and half cash, it only represents about $29 right now based on a lower MSFT share price ($28).

A Microsoft deal is still most likely, perhaps at $33 or $34 if Yahoo is lucky enough to get a higher offer. All of this back and forth commotion will likely keep Microsoft's stock price under pressure. When it is all said and done, there will likely be an attractive entry point for that stock. Should Yahoo agree to a deal with them, the merger arbs will be shorting MSFT until the deal closes. But after that, Microsoft shares will look very cheap.

Even at current prices ($28), prior to a higher bid or arb selling pressure, MSFT sells for 14 times this year's earnings. For a company with double digit earnings potential going forward, that's a very reasonable price. Should it get even cheaper, more value investors will likely get involved, regardless of their opinion of a Yahoo tie-up.

Update: 8:15AM (forgot to add the disclosures)
Full Disclosure: Long shares of Yahoo at the time of writing

Apple's Valuation Looks Attractive Again

The recent drop in shares of Apple (AAPL) has probably been more pronounced than most expected. It's true the stock was very expensive at its all-high of more than $200 per share (40 times forward earnings) but the catalyst for the sharp $80 per share drop we have seen recently was the company's extremely conservative guidance for the current quarter. Apple always sandbags quarterly guidance, so this did not come as a surprise, but evidently investors were hoping they would have been a little less cautious. However, in this day and age, when quarterly guidance is given simply to help out Wall Street analysts, under-promising is the only way to go. This is true even more right now as the economic climate is highly uncertain.

Despite all the reasons to be worried, the fundamental story behind Apple is still strong. The company is gaining market share in desktops, notebooks, and cell phones, and is holding their lead in music players. The company will not be immune to a consumer led slowdown, but market share gains will allow them to hold up better than the competition. Given that, and the likelihood that Apple will earn well north of $5 per share during calendar 2008 (current consensus estimates stand at $5.27), the current share price of $119 looks very attractive is investors are willing to wait out the uncertainty in the economy.

Not only does Apple stock trade at only 22.6 times this year's expected earnings, which will likely prove conservative as usual, but the company has quietly been building up a gigantic pile of cash. Apple hasn't been buying back shares aggressively or making large acquisitions, so cash reserves are rising at a staggering clip. Shown below are the company's cash balances as of the end of the last four fiscal years, as well as the last quarter. And keep in mind Apple has no debt whatsoever on its balance sheet.

Apple Cash Balances ( in millions of USD):

Sept 2004: $5.46 billion

Sept 2005: $8.26 billion

Sept 2006: $10.11 billion

Sept 2007: $15.39 billion

Dec 2007: $18.45 billion

Apple currently has $21 per share in cash, with no debt, yet another reason to be attracted to the current stock price after a drop of more than $80 from its high. Steve Jobs has been hesitant to part with his cash in recent years (the company had liquidity issues years ago before the iPod came along), but eventually he will accumulate so much that he will be forced to do something with all of it. Large acquisitions are a less likely option, but a huge stock buyback or one-time dividend would certainly excite investors.

Full Disclosure: Long shares of Apple at the time of writing

More on Yahoo/Microsoft

Since several Peridot clients own shares of Yahoo! (YHOO) I figured a discussion of my game plan would be in order. It's interesting that YHOO shares are trading at $28 and change, nearly 10% below the initial Microsoft (MSFT) bid.

Most of the other money managers I've seen quoted agree with me that Yahoo! really has no other choice but to sell itself at this point. Their lack of progress as an independent company (and as a result, sub-$20 share price) makes any offer in the 30's from a large player nearly impossible to get away from. CNBC's Squawk Box anchors called the bid "Murdochian," which I thought was a perfect characterization. Dow Jones could not turn down $60 per share when the stock was in the 30's on its own. The MSFT premium isn't as large, but it's close.

It is no secret that Jerry Yang and Co. really prefer not to combine with Microsoft (or else they would have done so a long time ago), so this hostile offer gives them an opportunity to try and find other potential bidders to start an auction for the company. Sources have reported that both hedge funds and other large media companies might be interested in making bids, so this could get very interesting. I don't know how accurate those reports are, but I would guess there would be at least a 50% chance (maybe as high as 60%-65%) that another party makes a bid.

Combine that possibility with the fact that Yahoo! is trading at a wide discount to the $31 offer (Yahoo!'s board will take its time deciding and then getting anti-trust approval also won't be quick), and you might be able to guess that I am not selling any YHOO shares yet. The odds are very good that shareholders get $31, and a bidding war is not out of the question by any means.

I hope there are other bidders, because MSFT certainly has the cash to raise their offer, but they won't bid against themselves just to hasten an acceptance from YHOO's board. Rejecting $31 and seeing a sub-$20 quote again just isn't something they can afford to do.

Full Disclosure: Long shares of Yahoo! and waiting it out

Microsoft Aims for Yahoo! Again

A couple of thoughts on a Friday:

1) Yahoo! Must Merge with Microsoft

A year ago Yahoo! rebuffed Mister Softee's attempt at a buyout, thinking they could get their share price (then in the high 20's) above the mid 30's offer price on their own just by turning around the business. Well, they were wrong. With Yahoo! dipping under $20 after the latest sub-par earnings report, and little in the way of promise that they can monetize the undervalued share price, Microsoft throws investors a $31 per share bid. Yahoo! can't turn this down. Shareholders will revolt, myself included. Of course, the Feds have to approve the deal along with Yahoo's board. But what do you think, would combining Yahoo! and MSN accomplish anything in terms of Internet market share?

2) Potential Bargains in the Drug and Bank Areas

I'm a bit behind schedule blogging about these, but hopefully next week I'll have some thoughts on a couple of large cap laggards; Citigroup and Merck. The goal is to make a compelling long term argument for each, but I'll let you all be the judge as to how well I can do on that front. Feel free to share your opinions if you have any of those two.Until then, have a great weekend!

Full Disclosure: Long shares of Yahoo! and Merck at the time of writing, while considering the merits of Microsoft and Citigroup