Microsoft's bid for Yahoo! still the best fit, analyst says; Electronic Arts bid for Take-Two likely to go up

By Paul A. Harris

St. Louis, April 17 - Reports that Yahoo! Inc. has struck a bargain with Google Inc. in which Yahoo would outsource its search advertising to Google left Yahoo's (Nasdaq: YHOO) shares 0.99% lower on Thursday, down $0.28 to close at $28.03.

One equities analyst who covers Yahoo told Prospect News that the Yahoo-Google partnership is a longshot, with respect to getting past the regulators.

The analyst also believes that the Yahoo-Google ad deal was struck, at least partially, in an attempt to derail Microsoft Corp.'s unwelcome $29.24 per share half-cash/half stock bid for Yahoo.

"Our view is that a Yahoo-Google search partnership would face intense antitrust scrutiny," the said the analyst, who agreed to speak on background.

"As such it does not seem like a plausible alternative for Yahoo, at least not in the long run.

"But that doesn't stop them from pursuing it, probably in an attempt to try and drive a higher bid."

When Microsoft unveiled its bid for Yahoo at the end of January, its shares traded as high as $32.60.

Those shares closed Thursday at $29.22, up $0.27, or 0.93%, on the day, but down more than 10% from the late January level.

The analyst who commented on Thursday said that, since Microsoft's bid is half cash and half stock and the stock is lower from the time Microsoft made the bid, the Redmond, Wash., software giant may have to tweak its bid.

"Our bottom line is that Microsoft seems to be the most motivated and capable buyer of Yahoo," the analyst said.

"Microsoft probably will raise its bid. But given that Yahoo's alternatives, such as this Google deal, are not that plausible, and don't seem nearly as attractive as the Microsoft bid, we don't think that Microsoft will materially boost the bid."

This source thought that raising the $29.22 bid by 10%, and making it an all-cash bid, should remove the uncertainty among Yahoo shareholders, and get the merger across the finish line.

Yahoo! earnings seen aiding Microsoft

The analyst further believes that when Yahoo reports earnings on Tuesday Microsoft will gain an even greater amount of leverage.

"That will give us a peek into what's happened, and tell us whether Yahoo's business has deteriorated, as some people suspect," the analyst said.

"The indications are that the business has slowed down, which should enhance Microsoft's position."

The analyst said that the Street does not expect Yahoo to miss earnings, but rather to come in at the low end of its guidance.

"It's a soft environment for Yahoo right now, which doesn't help its position," the analyst said.

Meanwhile on Thursday shares of Google (Nasdaq: GOOG) fell 1.21%, ending down $5.49 to close at $449.54 per share.

Yahoo has also been in merger talks with Time Warner Inc.'s AOL unit. Time Warner (NYSE: TWX) closed the Thursday session at $14.74, up $0.13, or 0.89%.

Analyst sees higher bid for Take-Two

With the release of Take-Two Interactive Software, Inc.'s highly anticipated Grand Theft Auto IV video game less than two weeks away, noise surrounding Electronic Arts Inc.'s all-cash $26 per share hostile bid for the company has hardly abated.

In a Thursday 8-K document filed with the Securities and Exchange Commission the company disclosed that on April 11 Michael Maulano, "an alleged stockholder," filed a class action lawsuit in the Supreme Court of the State of New York against Take-Two and the eight current members of its board.

Maulano contends that the board breached its fiduciary duties by, among other things, allegedly refusing to explore premium offers by Electronic Arts to acquire all of Take Two's shares, enacting a by-law amendment allegedly designed to entrench the current board, approving an amendment to a management agreement with ZelnickMedia Corp. allegedly designed to entrench the company's management, adopting the stockholders rights plan allegedly to thwart Electronic Arts' tender offer [set to expire Friday], and issuing a proxy statement and response to that offer that allegedly contained misleading and incomplete information.

According to a special situations equities source the Federal Trade Commission issued a Second Request over a possible merged entity, and the German Federal Cartel Office has inquired about the deal. Take-Two expects to comply with both requests.

On Thursday Take-Two shares (Nasdaq: TTWO) closed at 25.85, down 0.92%, or $0.24 on the day.

Todd Mitchell, of Kaufman Bros., an equities analyst who covers Take-Two, expects that ultimately Electronic Arts will have to bid higher.

"At this point I think that there is a fairly strong consensus that Take-Two shareholders are not going to accept this offer.

"I think EA will be a disciplined bidder," Mitchell added, specifying that Electronic Arts will not likely do anything dilutive to its fiscal 2010 numbers.

"That implies that they could probably do something in the range of $30 to $32 per share - maybe a 10% premium on top of their original offer, or perhaps a little more."

"I think they have been signaling the Street to that effect," Mitchell said.

The analyst did not seem impressed by news that regulators in the U.S. and Europe seem determined to take closer looks.

"You've seen a reasonable amount of consolidation in this business recently, but my sense is that there is nothing that would push this over the top," he said.

Meanwhile during recent weeks there has been a perception in the market that Take-Two wishes to hold off negotiations until after the release of its new version of Grand Theft Auto on April 29, after which it will have greater leverage in the deal.

On Thursday Mitchell said given that the new Grand Theft Auto game release is on time and strong, it would seem to make little sense to accept an offer beforehand.

As for Electronic Arts shares (Nasdaq: ERTS), they closed 1.08% lower on Thursday, down $0.56, at $51.46 per share.

A cold streak

In the gaming space a special situations equities source noted that Penn National Gaming received approvals from the Pennsylvania State Horse Racing Commission, subject to completion of an investigation, and the New Mexico Racing Commission for its proposed acquisition by Fortress Investment Group LLC and Centerbridge Partners LP for $67 per share, which Penn National accepted last June.

Penn National shares (Nasdaq: PENN) closed at $40.36 on Thursday, 0.77%, or $0.31, higher on the day, but down approximately 35% since the deal was announced.

The source made reference to reports that the deteriorating outlook in the casino sector may have eroded confidence that the Penn National deal will ultimately get done.

Elsewhere in the same business, Thursday trading saw shares of MTR Gaming Group, Inc. Nasdaq: MNTG) gain $0.19, or 3.18%, to close at $6.17.

Pinnacle Entertainment, Inc. (NYSE: PNK) closed at $13.27, up 1.38%, or $0.18.

And Isle of Capri Casinos (Nasdaq: ISLE) gained $0.11, or 1.6%, to close at $7 per share.

Meanwhile the major indexes ended the Thursday session mixed.

The S&P 500 gained 0.06%, or 0.85 points, to close at 1,365.56.

The Dow eked out a 0.01% gain, or 1.22 points, to close at 12,620.49.

The Nasdaq closed in the red, down 0.35% or 8.28 points, to close at 2,341.83.

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