Fund Overlap Favors No Microsoft/Yahoo! Bidding War

SAN FRANCISCO - Yahoo!(YHOO) shouldn't hold out for too high a price, if institutional investors have anything to say about it.

The company is fending off a takeover bid from Microsoft(MSFT), made Feb. 1.

But overlapping ownership of both stocks reduces fund managers' incentive for a deal at a higher price, according to Risk Metrics Group.

Bill Miller, portfolio manager at Legg Mason Capital Management, has publicly pushed for Microsoft to up its offer of $31 a share. Because Microsoft's share price has fallen since the offer, the half-cash/half stock deal is now valued at $29.01 a share.

"Don't expect to see many of the other top Yahoo! shareholders following Bill Miller's lead," notes RMG's M&A Edge note issued Friday.

Most of the top institutional investors in both companies own far more stock in Microsoft than Yahoo!, according to the note. Because the dollar exposure is "tilted in favor of Microsoft, we can expect shareholders who own both companies" to pressure Yahoo! directors" to settle for something that does not destroy the benefits of the merger, the analysts wrote.

In other words, institutional investors may pressure Yahoo! to hold out for just enough of a sweetener to save face, but far short of the $40 a share the company has said it wants.

Among the top 20 institutional investors with cross-over holdings, the average stake in Yahoo! is worth $798 million. But their average stake in Microsoft is valued at $3.1 billion.

Of the top 20 institutional investors with holdings in both stocks, only three own more of Yahoo!, of which Legg Mason is one, according to RMG. "It's not surprising that ... Bill Miller has publicly called on Microsoft to raise its offer," RMG notes.

In contrast, many other institutional shareholders "may be more concerned with whether Microsoft will get caught up in a 'deal frenzy' and suffer the 'winner's curse' by overpaying for Yahoo!," RMG stated.

Microsoft closed Friday at $28.42.

The 13% drop in Microsoft shares doesn't bode well for the long-term value of the transaction, RMG noted, citing the continuing decline of share value for several other acquirers long after their deals were announced. For example, shares of Macrovision(MVSN) dropped 21.4% the day it announced its deal to buy Gemstar-TV Guide(GMST) Dec. 6, according to RMG. Macrovision stock is now down 36% from its pre-deal price, closing Friday at $16.60.

And shares of Symantec(SYMC) have never recovered from the 16.5% hit they took the day the company bid for Veritas in December 2004. The stock is down 47% from its pre-deal price, closing Friday at $17.54.

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