Microsoft
In our coverage of technology stalwart Microsoft Corp in today's report we made the following comment:
"The group's pace of acquisitions is also picking up in response to the dynamic changes taking place in the sector. We believe these are positive developments which will ensure that Microsoft does not get left behind by an industry undergoing constant reinvention."
Solid cash flows during the first six months of $10.4 billion, up 71 percent, and a balance sheet bereft of debt, means the company is a strong position to pursue these growth opportunities as they arise."
After publication and before the markets opening this morning the 'pace of acquisitions' referred to above received a significant boost.
In an audacious bid to strengthen its presence in the on-line search and advertising space (which we also alluded to in FAT81), Microsoft launched an unsolicited $44.6 billion offer for Yahoo!.
Whilst the deal in our view makes good business sense, if Microsoft is to make a serious and timely assault on Google's dominant position, there are also counter balancing factors to consider. For instance, the deal is pitched at a healthy 60 percent plus premium to Yahoo!'s closing price on Thursday. Also, integration between two such large organizations is rarely straight forward.
Although regulators and politicians have signaled their intent to review the tie up from a competition perspective, we do not envision this becoming a deal stopper.
On the other hand, the market potential for on-line search and advertising revenue is too big a prize to simply concede and joining the party late, Microsoft inevitably needed to play catch up. In addition, the synergies on offer from a successful integration are estimated to be in the area of $1 billion.
As things stand today, nothing is final. Yahoo!'s recent performance has no doubt made them vulnerable to today's offer. We are confident that Microsoft's management can create a stronger offering from the combined capabilities of the two companies and justify the price. Our remaining concern then boils down to at what price Yahoo! or investors will be won over.
We will be watching developments closely, but for now our advice remains the same, Microsoft will remain firmly held in the Fat Prophets portfolio.