Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money. For more about the contributors, click here.

Yahoo starts its kabuki dance

Yahoo's board met Friday to discuss and then reject Microsoft's cash-and-stock acquisition offer. And why wouldn't they? Consider:

--Microsoft offered a 50/50 combination of cash ($31 a share) and stock

--Microsoft shares closed at $28.56 Friday. That means Microsoft would pay $27.16 in stock for each Yahoo share.

--Under the 50/50 scenario, that put Microsoft's bid at $29.08 a share. But Yahoo shares closed at $29.20 on Friday.

So it's no wonder that Yahoo would dismiss the offer as too low. And the Street seems to agree, because today Yahoo shares have climbed to $30. That shows investors are hoping for a better deal. As the New York Times points out, Yahoo shares would sink if investors truly believed Yahoo was going to ignore all offers and go it alone.

Microsoft shares fell 1% today on the news, by the way, causing the value of its offer drop further.

Expect posturing from both sides this week. Yahoo, desperately trying to come off as having alternatives to Microsoft, is floating the idea that it could merge with AOL instead. Doesn't sound like official Yahoo-AOL talks are underway, though, so I chalk this rumor up as a negotiating strategy. Investors saw through this one too: Time Warner shares were basically unchanged today.

Yahoo wants at least $40 a share from Microsoft, according to the WSJ.

"There is a clear path to a higher offer," an investment banker told the LA Times. "The board knows it and is already engaged in the elaborate kabuki dance to get there. They will." 

Microsoft is off on an elaborate dance of its own, having already met (according to the New York Post) with Yahoo's biggest shareholder, Capital Research and Management. According to Yahoo's last proxy, the only other major shareholders are Legg Mason Capital Management and Yahoo's co-founders, Jerry Yang and David Filo. The company has other alternatives, such as making an offer directly to Yahoo's shareholders or pushing to replace Yahoo's directors.

"You have to be disciplined and ruthless," Microsoft CFO Chris Liddell told the NYT.

Maybe the hostile bid will get a little more hostile. 

Disclosures: I don't own shares of any companies mentioned in this post. And while Microsoft owns this blog, Microsoft does not control, censor or otherwise have any editorial influence over what I write.

Back to Top Stocks Digg this | Email this | Link to this

Comments

 

Market Update

Dow | Nasdaq | S&P

Dow	11,288.54	+73.03
NASDAQ	2,245.38	-6.08
S&P	1,262.90	+1.38
10-Yr Note	99.13	-0.16

10:40 AM ET

Subscribe to this blog