Microsoft's Deal Needs Time to Digest

"We believe Microsoft's timing is intelligent," Mark Murphy, analyst with Broadpoint Securities, wrote in an email Friday. Microsoft's patience in waiting "for Yahoo! to stumble with management changes, turnover and strategic setbacks," gave Microsoft a better price opportunity. The company is "making this bid on the heels of a month in which Microsoft gained Internet search market share vs. Google, which is a rare feat, Murphy added.

Yet Wall Street speculation is running rampant that Microsoft's bid, a 62% premium over its price Thursday, won't be good enough to close the deal.

Although Krans expects shareholders to pressure Yahoo! to accept the deal, Microsoft ultimately will have to come up with a higher offer price, "considering Yahoo! shares were trading above $30 per share just three months ago and that Yahoo! believes its unconsolidated assets are worth in excess of $10 per share."

The offer price is about 17 times earnings before interest, taxes, depreciation and amortization, according to Kirk Materne, analyst with Bank of America. Given that buyout multiples in the Internet sector have historically ranged around 23 times EBITDA, "we believe Microsoft has some room to ratchet up the price," he wrote in a note Friday. Microsoft is an investment banking client of the firm.

It will be hard for either Yahoo! or Microsoft to make headway in the online search market in 2008 as standalone companies, according to Krans. "A combination of Microsoft and Yahoo! may be the only way to present a serious challenge to Google in the Internet search market."

Combined, MSN and Yahoo! could reach 600 million users and perform 28.3% of all searches, JPMorgan analyst Imran Khan wrote in a Friday note. Yahoo! is an investment banking client of the firm.