Investors split over Microsoft's Yahoo bid

Regardless of what you might think of Microsoft, the fact is that its $44.6 billion (£22.3 billion) cash and shares takeover bid for internet portal Yahoo is a generous offer, one that has split the financial community.

As potential rivals and so-called 'white knight' suitors including AOL and News Corporation emerge, institutional shareholders, pension funds and other fund managers - the people who will ultimately decide Yahoo's fate - are rapidly separating into two opposed camps, for and against Microsoft's offer and proposal.

For example, Joe Rosenberg the chief investment strategist for Loews doesn't think much of offer, nor the financial savvy of Microsoft's chief executive, according to a report in the latest issue of business weekly Barron's.

"It's a bad refection on Ballmer that he's willing to pay a ridiculous price for Yahoo. Microsoft is not going to earn anything like a reasonable rate of return in Yahoo," Rosenberg was quoted as saying.

"It just doesn't make sense. It will be even more ridiculous if Microsoft increases its bid," he said.

While Rosenberg is not alone in his view, not everyone is so negative about the offer and the longer term pay-off for Microsoft if it is successful.

Financial risk management analysis company RiskMetrics Group found that close to 90 per cent of Yahoo's institutional shareholders have a cross-holding in Microsoft, including most of the top 20 - and generally have significantly more money invested in Microsoft than in the web and advertising player.

A shareholder that owns both the target and an acquirer will be more interested in the net benefit of a deal, RiskMetrics said. Shareholders with more money invested in Microsoft than Yahoo will most likely urge Yahoo not to push its case too hard.

"They may be more concerned with whether Microsoft will get caught up in a 'deal frenzy' and suffer the 'winner's curse' by overpaying for Yahoo," RiskMetrics analysts wrote in a research note.

"We can expect shareholders who own both companies to pressure Yahoo directors to extract a material sweetener from Microsoft (which will help Yahoo directors save face) that isn't seen to destroy the perceived benefits of the merger, prior to ... ultimately succumbing."

Legg Mason, the US-based asset management company and second-largest stakeholder in Yahoo has already called on Microsoft to raise its offer, but remains positive about the potential for a tie-up. Mason holds stakes in both companies, but its larger stake rests with Yahoo.

The changes in share values of both Yahoo and Microsoft stock since the bid was announced has not helped matters. Microsoft has seen its shares slide and Yahoo's rise enough to wipe out $40 billion (£20 billion) of value for Microsoft, almost the cost of the current deal on the table.

With so many serious alternatives emerging for Yahoo to consider, the chances of an improved bid from Microsoft look high. However, potential poison pill has emerged in the form of Chinese internet portal operator Alibaba Group, in which Yahoo holds a 39 per cent stake.

The company, with prompting from Chinese authorities, is believed to be lobbying for better representation in a post-Microsoft Yahoo, something which could prove awkward for all concerned.

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