Yahoo shares touching on pre-Microsoft level

Update at 3:26 p.m. PDT, with analysts comments

Yahoo shares fell below $20 on Tuesday, coming within a breath away from its previous trading level before Microsoft launched its failed buyout attempt five months ago.

Shares of Yahoo, which have been on a steep decline since the company announced on June 12 that Microsoft was no longer interested in buying the company and that a partial sale of its search business to the software giant did not make sense for Yahoo, dropped as much as 5.2 percent in intraday trading to $19.59 a share, before recovering a portion of its lost ground to end the trading day down 2.23 percent at $20.20 a share.

That stock performance has brought Yahoo virtually full circle to the level at which its shares were trading prior to Microsoft publicly announcing its unsolicited buyout bid on February 1, which valued Yahoo at $31 a share. The day before Microsoft made its buyout bid public, Yahoo closed at $19.18 a share.

For Yahoo, its share price has gone on a wild ride during the past five months, occasionally getting hit with a case of whiplash.

As expected, after Microsoft announced its unsolicited buyout bid for the company, the Internet search pioneer's shares went on a rocket ride, soaring 48 percent the following day. The stock continued to trade in the $28 to $29 per share range until mid-March, when it suffered a slight setback after Time Warner's AOL announced it would acquire social-networking company Bebo in a $850 million transaction.

Time Warner had been rumored to be a potential rival to Microsoft's Yahoo bid, with a potential swap of assets that would have involved AOL. News of the Bebo deal pushed Yahoo to $27.50 per share that day, and it continued to slide as low as $25.85 a share in the subsequent two days.

But Yahoo's stock got a lift when the company reaffirmed it would meet its first-quarter guidance, calming investors' concerns that Microsoft would use a weak earnings report to lower its buyout bid or use it as an excuse not to increase its offer.

But the biggest whiplash for the shares came in early May, when media reports on May 2 fueled speculation a friendly buyout bid at a higher price was about to be announced, only to come crashing down the following day when Microsoft announced over the weekend that it was withdrawing its offer.

When the markets closed that following Monday, Yahoo shares finished the trading session down 15 percent at $24.37 a share.

It wasn't until investor Carl Icahn announced his proxy fight to unseat Yahoo's board in mid-May that the shares jumped into the high $27 a share range.

Yahoo's shares continued to trade in the $27 to $26 per share range through mid-June, until the company announced on June 12 that the two parties were going their separate ways and Microsoft had no interest in buying it--even at its previously stated sweetened price of $33 a share or its initial price of $31 a share. The software maker was interested in buying only Yahoo's search assets, a move the Internet company turned down.

As Yahoo heads toward its August 1 shareholder meeting and proxy battle with Icahn, it is trying to woo investors to re-elect its current directors, rather than side with Icahn, who is seeking to oust its board members and install his own slate of dissident directors.

But the release Monday of Yahoo's shareholder presentation materials, where it outlines its efforts to negotiate with Microsoft and how it will move forward as an independent company, failed to aid Yahoo's share price performance and may have possibly hurt it.

One proxy solicitor observed: "The presentation had some impact on their share price. I can't say that is entirely what impacted its price, but anytime a company puts out information to investors, the market reacts."

Wall Street analysts expressed similar sentiments.

"Yahoo's investor plan communicated there is little to no prospect of a deal with Microsoft," said Jeffrey Lindsay, an analyst with Sanford C. Bernstein & Co. "The Yahoo plan sees no possibility of a deal with Microsoft, but that may change once Carl Icahn puts forth his rebuttal."

Yahoo's return to its pre-Microsoft trading levels indicates investors have given up hope on a deal with the software giant.

"Clearly, the last of the opportunistic arbitragers have cleared out," said Lindsay.

Ross Sandler, an analyst with RBC Capital Markets, noted that not only have investors given up hope on Microsoft returning, but so have Wall Street analysts and members of Yahoo's senior management.

"Senior executives below the top five executives have all lost confidence in Yahoo and the management team," Sandler said. "The concept of Microsoft coming back at this point is pretty much a long shot."

Not only has the stock dropped but Lindsay noted that Yahoo's share price may reflect investors believe the company is in a worse position now than it was prior to Microsoft's bid earlier this year.

"When you factor in Google and assume it adds $3 per share to Yahoo's stock price, that implies Yahoo is only worth $17 a share. And then you take off $9 a share for all of its investments like Alibaba and its cash on hand, then that puts you at $8 a share just for Yahoo alone," said Lindsay, in crunching the numbers.