Microsoft OK's $40B Stock Buy-back - But The Real Target May Be Yahoo

The timing of the Microsoft buy-back decision raises interesting considerations. On the surface, the initial take is that Redmond is telling the world it no longer has any interest in buying Yahoo. Microsoft sees its own long term growth as positive and a better financial play than investing in a Yahoo turn-around. But things are not that simple and probably not what they seem.

As Icahn said, and everyone knows, if Yahoo and Microsoft don’t do something together, the Google juggernaut will continued unchecked, eventually crushing Yahoo and possibly placing Microsoft in a subordinated position in the new Web 2.0 world order. Rest assured that Microsoft isn’t going to simply roll over and hand the kings crown to Google without a fight.

Microsoft understands that there is simply too much at stake to ignore a Yahoo deal and Yahoo knows that its very survival may hinge on a Microsoft purchase. There won’t be any Google/Yahoo deal that will help – the Feds won’t allow it and Google would only leverage such a deal into an insider play to “Borg” Yahoo.

Microsoft made this buy back announcement just weeks prior to the end of the quarter and Yahoo’s financial reporting, which is expected to be disappointing, at best. Yahoo’s stock is languishing around $20 per share. By apparently taking itself out of any merger talks, Microsoft may have intentionally put a shiver through the Yahoo stock price. If Yahoo’s stock has been propped up by investor hopes that Icahn can force a sell-out to Redmond, then the withdrawal of Yahoo’s only serious suitor could seriously shake the stock value . And that may be Microsoft’s intention. It’s certainly interesting timing.

If that happens, Yahoo may find that it has a large number of unwanted and inappropriate take-over suitors. In that case, they have limited options including selling at a greatly reduced price or fending off more hostile actions. Microsoft’s actions would seem to force Yahoo to talk merger with them, at a price drastically lower than the springtime offer, which would be attractive enough for Microsoft to divert some of the $40B earmarked for buy backs into a purchase of Yahoo. And it may happen even before the mid-October reporting because a poor quarter and loss of a desirable buyer could drive the stock price sown to frightening levels. Should Yahoo foot drag, Microsoft can simply wait them out and, should the stock price collapse, possibly do some real bottom feeding later in the year.

The back and forth between Redmond and Sunnyvale is pure hard ball negotiations. Microsoft would be happy with certain parts of Yahoo and would like to pay as little as possible, possibly selling off the undesired parts. For Yahoo, it’s more ego than business. Yang doesn’t want his company broken up or subordinated to a buyer like Microsoft. Too bad. The market will win this one and Yang needs to understand that. We’re approaching the end of the quarter and the beginning of reporting season which signals the real beginnings of the Yang-Icahn struggle. And, as usual, Microsoft is just licking its’ chops.