Microsoft-Yahoo Deal Likely To Go Through

Yahoo Inc.'s (YHOO) stock was coasting just below Microsoft Corp.'s (MSFT) $31-a-share offer price Tuesday morning as more analysts said they believe the marriage will likely be consummated - even as they cautioned investors to be ready for surprises.

Yahoo has yet to respond to Microsoft's $44.6 billion bear-hug bid to acquire the Internet giant, a move which has prompted rival Google Inc. (GOOG) to publicly voice its opposition to the proposed merger.

On Tuesday, Yahoo was downgraded from buy to neutral by Banc of America Securities. It was the third such downgrade since Microsoft announced its offer on Friday, following similar moves by Susquehanna Financial Group and Soleil Securities Group.

The downgrades came after Yahoo's stock zoomed up more than 50% following the bid - which put the stock in range of several analysts' price targets.

In their reports, many analysts predict that the deal will likely happen and that, for now, investors would be wise to stick close to Microsoft's offer price, which they describe as generous.

"Given the significant premium above the Jan. 31, 2008, stock price, we believe shareholders would be apt to take advantage of this offer," analyst Brian Pitz of Banc of America Securities wrote in a note to clients.

Crawford Del Prete of International Data Corp. said he thinks the deal will eventually happen.

"But I think, given that it's hostile, it will take some time for Yahoo to sort through its options," he said in an email. "However, in the end I expect that they will conclude that this is the best option for shareholders, given the price that was offered and the absence of other suitors."
Still, there could be surprises.

Pitz pointed to reported negotiations between Yahoo and Google on a possible deal to outsource Yahoo's search ads to its rival as a way of blocking the Microsoft bid.

Microsoft's bid could also go higher and, contrary to the view of some observers, another potential buyer could emerge, he said.

"While it's difficult to raise debt in the current market environment, we believe a rival bid from a private-equity consortium is also possible," Pitz said.

Analyst Mark Mahaney of Citigroup, who raised his target price for Yahoo to $31 a share from $22, cited the two scenarios in a research note, but didn't give them as much as weight as other potential outcomes.

He said the $45 billion price tag and "the strategic value of Yahoo to Microsoft make the likelihood of a successful competing bidder very low."

An outsourcing deal with Google would be more likely and could be a viable strategy that could appease Yahoo's shareholders, he said.

But Mahaney gave more credence to another possibility: That Yahoo will reject Microsoft's offer, prompting the Redmond, Wash.-giant to bid higher, with the two giants eventually coming to an agreement.

"The deal makes significant strategic sense for Microsoft," he said. "Our review of bid histories in the software space makes us think this is the most likely outcome."

Mahaney cited another software giant, Oracle Corp. (ORCL), which has been on a buying spree over the past several years. In two prominent unsolicited bids - for PeopleSoft Corp. and, more recently, BEA Systems Inc. (BEAS) - the company ended up raising its offer price.

Many analysts still believe the proposed merger between Microsoft and Yahoo would meet stiff regulatory challenges in the U.S. and Europe.

But given Google's dominant position in online advertising, some of them believe Microsoft would clear this hurdle.

"We estimate that Microsoft and Yahoo today account for, at most, 30% of total U.S. online advertising, with their combined market share less in Europe," Mahaney said. "Thus, while we would expect substantial regulatory review, we assign this outcome only a 10% probability

7 Stocks You Need to Know for Friday

Microsoft (NasdaqGS:MSFT - News) beat earnings estimates on Thursday afternoon, announcing $0.50 EPS over a consensus of $0.46 EPS. MSFT's PowerRating (for Traders) is 6

Tempur-Pedic (NYSE:TPX - News) missed earnings, reporting $0.52 EPS versus expectations of $0.53 EPS. TPX's PowerRating (for Traders) is 2.

Cash America (NYSE:CSH - News) also missed earnings, with $0.88 EPS versus a consensus of $0.90 EPS. CSH's PowerRating (for Traders) is 3.

Caterpillar (NYSE:CAT - News) reports earnings on Friday morning, with traders expecting $1.50 EPS. CAT's PowerRating (for Traders) is 3.

When Commerce Bancorp (NYSE:CBH - News) announces quarterly results tomorrow morning, analysts will be looking for $0.30 EPS. CBH's PowerRating (for Traders) is 5.

Harley-Davidson (NYSE:HOG - News) is set to report $0.82 EPS on Friday before the bell. HOG's PowerRating (for Traders) is 4.

WW Grainger (NYSE:GWW - News) is expected to announce $1.27 EPS tomorrow morning. GWW's PowerRating (for Traders) is 3.

Market Update Wed, Jan 23, 2008, 4:25AM ET - U.S. Markets closed.

4:25 pm : There are volatile markets and then there are volatile markets. Wednesday's session was the latter variety, which is to say it was truly volatile. To wit, the swing in the S&P 500 between its low of the day, reached around 12:45 p.m. ET, and its high of the day, reached around 3:50 p.m. ET, was 69 points or 5.4%.

The bearish mood that predominated for the first half of today's session was driven by a relatively disappointing earnings report and outlook from Apple (AAPL 139.07, -16.57) and a remark from ECB President Jean-Claude Trichet that left participants inclined to believe the ECB won't be following the Fed's lead and cutting its key bank rate.

The latter precipitated a widespread sell-off in European bourses, most of which dropped between 3.0% and 5.0% for the day. Their poor showing carried over to the U.S., which was already on the defensive amid consumer spending concerns that flowed from Apple's conservative outlook.

Briefly, Apple forecast fiscal second quarter sales of $6.8 billion and earnings of $0.94 per share versus analysts' expectations of $6.98 billion and $1.09, respectively.

Correspondingly, the tech sector led the early retreat along with the energy, telecom, and materials sectors, which traded down sharply on growth concerns. Those concerns were reflected in falling oil prices, which hit $86.65 a barrel at their low before rebounding some to $87.59 at the end of the trading session.

The energy sector declined as much 6.3% at its low today. Remarkably, it closed with a gain of 0.6% after participating in the afternoon rally.