Yahoosoft numbers just don't add up

OK, I am going to join the chorus: This rumored merger between Microsoft and Yahoo doesn't make sense to me. My rationale is from the point of view of Microsoft shareholders: They are losing $0.13 in earnings per share -- just about $1.4 billion that could be paid as a dividend -- with nothing to show for it but a questionably-nicer market position in advertising. And that's the best case I can come up with.

So here are the numbers from my simple-minded, back-of-the-envelope calculation. I'm assuming Microsoft would exchange 1.5 billion of its shares to acquire all of its 1.4 billion shares in an all-stock deal valued at around $50 billion. All the figures below are from Yahoo! Finance, ironically enough:

	Microsoft	Yahoo	Yahoosoft
Revenue	$49.56 billion	$6.53 billion	$56.09 billion
Net Profit	$13.86 billion	$0.73 billion	$14.59 billion
Shares	9.57 billion	1.36 billion	11.07 billion (assuming MSFT paid 1.5 billion shares for Yahoo!)
EPS (calculated as profit/shares)	$1.45	$0.54	$1.32

Now this falsely assumes that 1) there's no real cost to the merger other than the shares, 2) that every dollar now paid to the two companies will continue to get paid to them, and 3) that there's no overlap in customer base that might cause these numbers to go down. But bear with me and look at that right hand column as a best case scenario.

The numbers say to me that this is a great deal for Yahoo stockholders, who suddenly see their shares turned into much more profitable Yahoosoft shares. But for Microsoft shareholders, their shares are going to be valued about 16% less because of dilution, and their earnings on those shares decreased about 11%. All this to grab about 27% of an online advertising market that Google commands 65% of. Doesn't sound like a market where they're going to command monopoly-type profits. With apologies to Geoffrey Moore, Yahoosoft continues to be a chimp in a market dominated by the Google gorilla.

This rumored deal reminds me of when AOL decided it wanted to merge with Time Warner to bring Internet business smarts to the old and staid world of media. That merger nearly killed both companies. While that doesn't seem a likely outcome for a company as powerful as Microsoft is today, people said much the same about powerhouse AOL in the mid-1990s.

Mergers are usually more about ego than about actual synergies and results. Looking at these numbers, I'd have to say that this one is no exception. Too bad the shareholders will be the ones paying for it.

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