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Microsoft is already $41 billion in the hole on the Yahoo deal

Why the drop in stock price? Is it an over-reaction?

Michael Horowitz

Michael Horowitz wrote his first computer program in 1973 and has been a computer nerd ever since. He spent more than 20 years working in an IBM mainframe (MVS) environment. He has worked in the research and development group of a large Wall Street financial company, and has been a technical writer for a mainframe software company.

He teaches a large range of self-developed classes, the underlying theme being Defensive Computing. Michael is an independent computer consultant, working with small businesses and the self-employed. He can be heard weekly on The Personal Computer Show on WBAI.

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Michael Horowitz

Bloggers are supposed to offer opinions, but when it comes to Microsoft buying Yahoo, the opinion of the stock market is much more interesting than anything I might say.

An article in the Wall Street Journal today (Chicken Little Investors? by Robert Cyran, Rob Cox and Dwight Cass of breakingviews.com) points out that since the proposed deal was announced, Microsoft's stock price has fallen 12%. In terms of market value, that translates to $41 billion. This over a deal valued at $44.6 billion.

What's scaring off investors? The article suggests:

  • Microsoft has overpaid for deals in the past
  • This would be the biggest takeover ever for Microsoft
  • Academic studies suggest mergers tend to destroy more value than they create
  • Steve Ballmer already looks stretched managing the company
  • Microsoft has struggled to crack the online-advertising market

Despite all this, the authors think the large drop in the stock price is an over-reaction.

Time will tell.