Vince Farrell of Scotsman Capital-Verbatim

From: vince farrell
Sent: Friday, February 01, 2008 7:35 AM

Microsoft offers a knockout blow to acquire Yahoo for $44 billion or about $31 a share vs. $19 where it closed yesterday. It's a hostile bid (why wouldn't Jerry Yang embrace this?) so the price reflects a Murdoch type strategy to crush any theoretical opposition with an offer that can't be refused. The market will love this and the futures are strong at this hour, even thought Goldman Sachs is predicting that there are still $60 billion in subprime writeoffs to come.

An obvious benefit for Yahoo holders. Does it make sense for MSFT? There will be the risk of consolidating two different cultures, but it's attractive from a cash flow return. Yahoo generates about a billion dollars in free cash flow now. I would guess Microsoft feels they can at least double that, and if that's correct, then the cash flow yield on the deal would be about 5%. That's enough to justify the big price tag.

It's interesting the deal comes at a time when Google just issued its first less-than-spectacular quarterly report. I would guess MSFT trades down as the acquiring company often does, but Steve Ballmer has done an excellent job as CEO of MSFT, and I think this is a logical step to jump forward into a very attractive area. I would bet that MSN stays as a separate brand and that Yahoo, with MSFT's financial muscle behind it, re-emerges as a competitive threat. I own MSFT and would be a buyer on this news. I said the other day that new leadership emerges during turbulent times, and besides refering to financial stocks, I mentioned a shift in tech names. Out out of Apple, Google, Research in Motion, Amazon which were great to own last year, and into MSFT, Cisco, Texas Instruments (all of which we own at Scotsman), Intel and IBM

Time Warner (which I own) and ASK.Com will trade higher on this news. Apply the MSFT/YHOO valuation and the others are worth more.

Almost makes you forget that the jobs numbers comes out this morning. Also, I'm watching Steve Liesman right now and he's reporting that there's a bank consortium being formed to help rescue the bond insurers. The banks are working with the NYS insurance department. The market will love this as well, but I find it hysterical that the banks, who are needing international rescue themselves, are going to turn around and be the rescuer.

And here I was hoping for a quiet day.