A little cyber-spat seems to be in prospect between Slate’s Daniel Gross and Portfolio’s Felix Salmon. It’s over the price of Yahoo.
In short, Gross reckons investors are effectively guessing that Microsoft will ultimately fail to acquire Yahoo, because otherwise shares in the internet firm would have shot up through the terms on the table, pricing in the likelihood of a higher offer from Microsoft.
In response, Salmon has slavishly gone through the mathematics of Microsoft’s cash and shares offer, pointing out that - as of yesterday - Yahoo was actually trading 2 per cent higher than Microsoft’s bid. He says Gross is just plain wrong.
As with much of the debate around Microsoft/Yahoo, this is a glass-half-full/half-empty affair. Gross and Salmon are both right - and both wrong.
You can factor in everything from regulatory risk through to the time value of money in assessing the premium or discount to the price Microsoft might eventually pay. But at the end of the day, any arbitrage opportunity in a takeover situation has to be filled with hard cash - and, given the size of this potential acquisition (circa $40bn), lots of it.
Sadly, anecdotal evidence suggests that the market animals who usually supply the capital at such moments have been having a tough time of late. A string of failed deals, coupled with huge spikes of volatility in equity markets, have combined to produce some horrendous losses amongst merger arbitrageurs and event-driven hedge funds. Some of London’s biggest such funds are said to have registered losses of ten per cent more more since the turn of the year.
What’s more, bid arb maths generally only work with the application of lots of leverage, and the prime brokerages at investment banks are not handing out the money like they once were.
A blend of Microsoft and Yahoo has its own risks. But the equity market generally also has its own constraints.
