It took a $44.6 billion bear-hug from Microsoft to highlight one of Yahoo’s biggest mistakes of the past three years: spending $4.6 billion on two big share buyback programs.
In the past three years, the Internet titan has spent that cash to buy its shares at prices far above the current level. The average price of Yahoo’s stock since March 24, 2005–the start of its first, $3 billion buyback program–is a little more than $30 a share. For much of the past year, the stock has been below that, often well below. Though the stock has hovered around $29 since the Microsoft bid, it was only Jan. 30 when the shares hit a 52-week low of $19.05.
WSJ colleagues Karen Richardson and Gregory Zuckerman recently traced the declining fortunes of share buybacks. Companies, of course, buy back shares for several reasons: because they see their stock as a good value, to signal their confidence in their prospects, to buy out restive shareholders and to boost earnings per share by reducing the amount of public stock in the market. By the last criterion, Yahoo hasn’t been very successful. Per-share earnings in 2008 are projected at 42 cents, according to Capital IQ. That would be the lowest since 2004, and far below the $1.27 a share earned in 2005.
And if the motivation was to quell restless shareholders, it hasn’t been too successful there either–witness that recent 52-week low.
What else might have Yahoo been doing with that cash? Perhaps it could have been making acquisitions or investing more in R&D that can boost its position in the Search and Ad wars with Google.
Consider “Project Apex,” a project designed to enable electronic ads to appear on everything from home computers to mobile phones. Yahoo announced a few weeks ago that Project Apex would be more expensive than it expected. Bear Stearns analyst Robert Peck believes the project’s increased costs pressed on Yahoo’s stock price and spurred Microsoft’s bid.
Next, consider other factors. With Microsoft’s bear-hug still gripping the company, Yahoo’s stakes in Chinese Internet concern Alibaba.com, Yahoo Japan and South Korea’s Gmarket add up to $14.3 billion, according to Citigroup Global Markets and WSJ.com data. Some now are speculating that Yahoo might have to sell those stakes in order to be well-capitalized enough to persuade shareholders it should, and can, stay independent.
As Yahoo scrambles, it is worth asking how much more secure its position would be if it hadn’t used all that cash buying itself up?
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Or maybe Yahoo would have invested that $4.6B internally in a bunch of low-return projects that didn’t generate any value. Management seems to have a track-record of doing that. Do we really want to assume that had we given them another $4.6B to invest, they would have done it well?
Comment by Dan Miller - February 7, 2008 at 4:18 pm
Believe me, I am not the smartest man around, but why in heaven sake would MSFT even consider buying Yahoo,that is dead money, huge mistake, you can put in down on paper and it looks good,but however you try and window dress this purchase, it will go down as your biggest blunder. Thanks for listening. George (the greek) Neofotis
Comment by George Neofotis - February 7, 2008 at 9:03 pm
Yahoo offers excellent strategic value.Going it alone it is a distant second to Google.With Microsoft it eliminates eventually falling into third place.It will be the greatest bargain of the M&A history even if microsoft ups the ante to $39.00.
Comment by renothecat - February 7, 2008 at 10:25 pm
$39!!! You’re on crack pal. It would be AT BEST $32-33.50The premium is enormous. Yahoo was headed to the TEENS and if MSFT pulls the plug. It WILL get there much faster. Like Oracle has just done….MSFT will do the same here. MSFT can easily offer to buy all outstanding shares from institutions and funds and investors. They will easily grab the majority then force BODs hand. They will look very stupid at this point. Hell even MSFT could let the deal fall through then offer to buy for LESS $$$.All in all….this is a DONE DEAL. NO ONE has the cash MSFT does…to the tune of $1BILLION a month
Comment by Mark, Valencia, Ca - February 8, 2008 at 12:38 am
MSFT bids on Yahoo.
A recent blog on this topic was at least humorous.This blog was posted at the announcement. The blogger was using a previous blog.
A Blog entry regarding MSFT buying Yahoo:
“Somebody said MSFT is just rearranging the deck chairs on the USS Vistanic. I don’t know if that’s true, but I still predict that MSFT will be the GM & F of the 21st century.
MSFT should be a reliable toaster or utility stock, but it is opening the door to AAPL & other competitors.”
My comment:That door may be open but MSFT is walking hand in hand with Apple through that door. I feel one of Microsoft’s best purchases was Apple stock at $5. I heard that. Not sure or of the price. Steve Jobs approached Bill Gates. Apple needed money to develop the iPod. MSFT not only sells Office for Apple. It is a part owner of Apple. MSFT makes money on iPods, iPhones, Apple computers, then selling the Office software. No wonder Bill Gates is so wealthy.
The MSFT and Yahoo game will be interesting. Then we, investors, are here to be entertained. Making money is second.
My next computer will be an Apple. Never thought i would say that. I am recommending my daughter Marin Lanier