Who profited from the Yahoo/Microsoft merger hoax?

The more I think about the rumor last Friday that Microsoft would merge with Yahoo, the more it seems like a very strange coincidence. After all, it was the second big media deal of the week. The story started in the New York Post on Friday morning, May 4, yet it was dismissed by the end of that business day by the Wall Street Journal. All the sources cited by the New York Post were anonymous, so the story was hard to refute without someone doing a lot of research. And with Yahoo stock soaring nearly 20% on the rumor during the day, someone could have made a lot of money.

If this were a large investor in Yahoo (i.e., one that owns more than 5% of Yahoo shares), we'll see a Securities and Exchange Commission 13G filing within 10 days or so showing that someone liquidated their shares. For example, there's a 13G filing from February 15 showing that Legg Maison Capital Management, Inc. controlled more than 5% of Yahoo shares on that date -- if they disposed of them on May 4, we'd see another filing in a couple of weeks.

But more likely, someone looking to profit from a quick bump in Yahoo shares could so so without actually owning them. They could buy call options, which would provide even more profit potential for the same amount of capital. Or, they could spread their ownership out among several unrelated corporations or hedge funds. It would be worth doing to make 20% or more on your money in a day.

Regardless, we're still left with the question, "Who would and could do this?"

Here's a theory. Earlier last week on May 2, Rupert Murdoch launched an unsolicited bid for Dow Jones & Co. The Bancroft family that controls Dow Jones rejected the offer. Yet Dow Jones has the potential to be a premiere brand for News Corp that would make all of Murdoch's other properties more valuable overnight. And Murdoch isn't the type of man who quits when he hears the word, "No." He also has access to a large number of dealmakers and investment bankers.

So imagine you are Rupert Murdoch on Wednesday morning. Dow Jones has rejected your offer, and you're looking for what to do next. You want to find a way to convince the Bancroft family to sell. You need to create urgency among the family, a feeling that they're missing out on a big opportunity. You want them to sell for $5 billion -- so what better way to make them feel like they are missing out than to create a rumor of a $50 billion media deal for one of their competitors? And if you bought enough Yahoo options and stock ahead of the story, selling those options on the breaking news would allow you to sweeten the Dow Jones bid later. All you would need to do is to find a place to print such a story.

Perhaps, the fact that Rupert Murdoch's News Corp. owns the New York Post -- the newspaper that broke the Yahoo-Microsoft story -- isn't such a coincidence.

Full disclosure: the author has no positions in any of the companies mentioned in this posting.

Technorati Tags: Marketing, Merger, Microsoft, Rupert Murdoch, Speculation, Yahoo