With Microsoft (MSFT), Google (GOOG), and Yahoo! (YHOO) ensnared in troika-like machinations, how should investors approach this intriguing triangle? Some of the smart-money pros think this unprecedented battle of the tech titans could produce solid returns for their portfolios, if played adroitly.
Microsoft's hostile $44.6 billion bid to gobble up Yahoo has forced Google to engage the software giant in a battle to protect its turf in search. [The deal's current value is $41.5 billion, based on a drop in Microsoft shares since the Feb. 1 announcement.] Regulatory issues would stymie any attempt by Google, the No. 1 Internet search engine, to launch a rival bid. Nonetheless, Google is determined to stop any Microsoft-Yahoo deal, and one way to accomplish that is to convince Yahoo to form an alliance in Web search. Yahoo is No. 2 in that lucrative business.
Yahoo's stock skyrocketed from $19 a share to $28 after Microsoft unveiled its not-too-unexpected designs. Microsoft's cash-and-stock offer is equivalent to $31 a share, So unless you are a nimble trader, forget about chasing Yahoo. The big money has been made. The risks in pursuing Yahoo stock at this high level should scare anybody who isn't a prescient, professional, swift-footed trader.
But there is a way to win from the Microsoft-Yahoo-Google triangle. First, assume that Microsoft will play a hard-knuckle brawl and won't let Google get in its way. Assume, as well, that ultimately Microsoft will have its way with Yahoo, perhaps paying a few billion more for the embrace.
Things Could Get Ugly
Yahoo will, of course, attempt to delay any deal as part of a strategy to persuade Microsoft to up the ante. Microsoft might just do that, up to a point. But since it doesn't look like there are eager white knights waiting in the wings -- because the deal is mighty expensive as it is -- Microsoft may not be inclined to be too generous with its offer. And who, aside from Google, has the resources and capability to pursue Yahoo at this high price and expect to benefit from the chase?
Yahoo may want to outsource part or all of its search-engine business to Google and others. That, of course, would be anathema to Microsoft, which could drop the entire offer. In that case, Yahoo's stock would crash and leave its shareholders in limbo. At best, Microsoft will fight like an enraged rejected suitor to get what it wants. That could get ugly. And Yahoo would see its chances vanish of providing shareholders with the value they deserve. Nobody can guarantee, or even imagine, that Yahoo's stock price will get to the level it is today without a deal like the one that Microsoft is offering. Yahoo shareholders have been waiting patiently for a turnaround. The Internet bubble burst in 2000, and the tech bulls have left Yahoo's playroom.
So what should investors do? You can't go wrong at this point if you buy shares of both Microsoft, now trading at $28 -- off from $37 in November, 2007, and way down from its high of $59 in 2000 -- and Google, currently at $505, down from its high of $747 on Nov. 7, 2007.
An Underappreciated Microsoft
Why buy Microsoft and Google now? Both are down from their highs and are looking very attractive as long-term holdings based on their prospects for solid growth. One big investor who has been upping his stake in Microsoft and Google is Martin Sass, chairman and CEO of M.D. Sass, an investment management company that shepherds $10 billion. Sass first purchased Microsoft shares in May, 2007, at $28 a share, and Google when the stock was at $365. Sass considers Microsoft a "value" play and Google a "growth" stock.
Microsoft has long been underappreciated by the Street and by investors. Sass figures the stock, currently trading at a price-earnings ratio of 14, is cheap based on the company's expectations of yearly double-digit growth in 2008 and 2009. Revenue growth is projected at 14% to 18% over the next two years, says Sass. In the current difficult economic times, Microsoft and Google are both doing fairly well, he adds.
Microsoft should continue to gain market share in software, generating 60% of its revenues in foreign markets. Excluding any deal with Yahoo, Sass expects Microsoft stock to hit $40 in a year. Should Microsoft bag Yahoo, that would be a big positive for Microsoft shares, says Sass. Some analysts worry that the potential integration challenges in buying Yahoo could generate headaches for Microsoft, in part because of a dilution in earnings. But they agree that the hostile bid for Yahoo makes strategic sense to jump-start Microsoft's online presence with consumers, advertisers, and publishers. It would enable the software giant to "better monetize its online assets over time," says Brad Reback of Oppenheimer (OPY).
Buy Recommendations
One of the bulls on Microsoft is Jim Yin of Standard & Poor's (MHP), who hoisted a strong buy recommendation based on the fundamentals even before the offer to acquire Yahoo. His positive rating is based on his expectation of higher sales of PC units from the launch of Windows Vista and the stock's relatively low valuation. His 12-month target for Microsoft [without Yahoo] is $43 a share.
Mark Murphy, managing director at Broadpoint Capital, who recommends buying Microsoft shares, supports its move to acquire Yahoo. The deal would change the global Internet search and advertising landscape so that it would essentially comprise just two major players. "A fragmented market would become a duopoly overnight," says Murphy. With Yahoo, Microsoft would gain enhanced engineering talent to drive innovation, he adds. Internet advertising depends upon scale and requires massive capital investments to build a global platform, and Microsoft could add to Yahoo's strength.
Google: An Opportunity as Well
And why buy Google? Even with a combined Microsoft-Yahoo to confront, Google will continue to have an edge in the search business, with a 75% share of the global paid-search market and 65% of the U.S. paid-search business. In Europe, Google's advantage is even bigger, with its 85% slice of the pie. "Google remains a very attractive long-term growth stock," says Sass, who forecasts earnings of $19 a share in 2008 and $23 in 2009, vs. 2007's $11.78.
Rob Sanderson of American Technology Research, who rates Google a buy, believes strongly that Google has several years of "exceptional growth ahead." With the stock's slide after some investors bailed out following disappointment with the recent quarterly earnings, and Microsoft's bid for Yahoo, Google represents a buying opportunity, argues Sanderson. Neither event changes the opportunity for Google to grow strongly for a number of years, he adds. His 12-month target for Google: $750.
Any time a value play like Microsoft and a growth stock like Google weaken in price, the opportunity to buy them should be considered a gift, especially if you are a long-term investor. With or without a Microsoft-Yahoo combination, both Microsoft and Google will be considerable winners in the years ahead. Of course, with Yahoo, Microsoft will be a more challenging rival for Google. That in turn will undoubtedly push Google to move aggressively to widen its lead over the Microsoft-Yahoo combo. Who would end up the loser? Investors who fail to buy into Microsoft and Google now.
credited by: BusinessWeek.com
2008-02-11
Making Science a Presidential Priority
When most of the Republican candidates for President proclaimed that they did not believe in evolution during a debate last year, astrophysicist Lawrence Krauss was one of many who were aghast. The Case Western University professor and best-selling author was even more upset when former Arkansas Governor Mike Huckabee shrugged off concerns, saying that he was running for President, not writing a middle-school curriculum. "How could being scientifically illiterate be perfectly acceptable?" Krauss asks. "No one would accept a candidate who, say, denied the Holocaust."
Instead of just fuming, Krauss seized on an idea then being proposed by screenwriter/director Matthew Chapman to stage a Presidential campaign debate focused on science. He linked up with Chapman and two other proponents, journalist Chris Mooney, author of The Republican War on Science, and screenwriter Shawn Lawrence Otto. In December, the group launched an effort to elevate the visibility of science in the Presidential race, starting an organization called Science Debate 2008.
Today, it's still hard to imagine science as a hot-button issue on the order of, say, religious faith or the war in Iraq. It's not even clear that a debate will happen: On Feb. 7, Science Debate 2008 sent invitations to the campaigns to participate in an event tentatively scheduled for April. There's been no response yet to the invitation, or to BusinessWeek's queries.
Frustrations with the Current Administration
However, the fact that more than 12,000 scientists have signed onto the effort, along with prestigious organizations such as the National Academies of Sciences, Engineering & Medicine and the Association for the Advancement of Science [AAAS], shows how serious some researchers are about elevating the profile of science in this election. "It's hard to get 12,000 scientists to agree on anything," says Alan Leschner, chief of AAAS and former director of the National Institute on Drug Abuse. "But science is the biggest issue facing modern society, and we are concerned that only one candidate -- Hillary Clinton -- has so far devoted any energy to science."
There's also a palatable hunger in the scientific community for a government that bases its policies on science, after years of decisions from the Bush Administration that they believe ignored scientific reality. "We have all become painfully aware in recent years that it is not only irresponsible but dangerous and expensive to distort and repackage scientific conclusions for political purposes," Otto explained in a recent editorial on the Salon Web site.
A couple of examples: The Bush Administration's conviction that Iraq was trying to build nuclear weapons might not have survived had the White House heeded scientists who pointed out that the aluminum tubes acquired by Iraq [cited as evidence of weapons building] were actually the wrong size for uranium enrichment, says Krauss. Or perhaps the Administration wouldn't have started its $1.2 billion Hydrogen Fuel Initiative if it had asked the National Academy of Sciences for advice first, instead of after. [The NAS was tepid on the idea, feeling its contribution to solving the nation's dependence on oil wasn't as great as the Administration claimed.]
There's no guarantee, of course, that any Presidential Administration will follow the science when the politics point in a different direction. Rice University professor and former White House science adviser Neal Lane recalls how President Bill Clinton backed away from expanding needle-exchange programs, even though the approach had clearly been shown to reduce transmission of AIDS and other diseases from dirty needles.
Consideration and Funding Sought
But rather than expecting firm positions on specific issues, what scientists mainly want now from the Presidential candidates are assurances that the next Administration will at least listen to the science and take it into consideration. "We don't want them to think about one or two hot-button issues, but rather how they would use science to inform decisions, and how they would use science and research to address the country's problems," explains Barry Toiv, spokesman for the Association of American Universities.
The research community, including high-tech companies, also wants the next President to boost funding for science. The main argument is that tomorrow's innovations, economic growth, and America's competitiveness all depend on investments today in research. "Science is not just a nice story," says Krauss. "Our standard of living today [depends] on research done a generation ago."
This argument was laid out in great detail in a recent NAS report, "Rising Above the Gathering Storm." And after strong lobbying by scientific and industry groups, Congress was sufficiently convinced of the need to pass a law authorizing increases in basic research. But it didn't happen. At the end of 2007, the appropriations committees balked at actually providing the money. "We really felt the rug was pulled out from under us," says Robert Spurrier Boege, executive director of the Alliance for Science & Technology Research in America [ASTRA].
The result has been continuing declines in government funding in many areas of science and technology. The fallout has already begun. Two of nation's top physics facilities, the Stanford Linear Accelerator and Fermilab, are laying off staff. On Feb. 12, top universities and business groups will hold a press conference to call on Congress to address the problem.
Some Worry the Effort Could Backfire
Researchers are also hoping a Presidential debate on science would help get this message across. They like some of what the candidates have said so far. [For a summary, see election2008.aaas.org/comparisons.] Hillary Clinton and Barack Obama both support big increases in basic research, along with targeted investments in energy. And like the two Democrats, John McCain promises action against global warming, though he's been silent on most other science issues.
Some experts warn that the effort to inject scientific issues into the Presidential race could backfire. "Anything that gets elevated on the political agenda has risks," explains Lane. It might be better to work quietly behind the scenes, suggests David Goldston, visiting lecturer at Harvard and former staff director of the House Science Committee. Scientists may feel slighted if their concerns are not in the limelight, but a high profile is not always the road to success, he argues. A case in point: Doubling of the National Institutes of Health's budget became a top political cause. But it happened too quickly and with too little care, leading to severe strains now that the budget has leveled off.
There's also the danger that scientists will be seen as just another interest group with its hand out. "The research community needs a more compelling message than 'give us 7% more money than last year,'" says Tom Kalil, special assistant to the chancellor for science and technology at the University of California at Berkeley and former deputy director of the National Economic Council during the Clinton Administration.
Krauss and his partners in the effort to get science higher on the agenda believe they have the right message: Our future prosperity, safety, and health depend on research, he says. We'll soon find out how much the candidates agree with that.
credited by: BusinessWeek
Instead of just fuming, Krauss seized on an idea then being proposed by screenwriter/director Matthew Chapman to stage a Presidential campaign debate focused on science. He linked up with Chapman and two other proponents, journalist Chris Mooney, author of The Republican War on Science, and screenwriter Shawn Lawrence Otto. In December, the group launched an effort to elevate the visibility of science in the Presidential race, starting an organization called Science Debate 2008.
Today, it's still hard to imagine science as a hot-button issue on the order of, say, religious faith or the war in Iraq. It's not even clear that a debate will happen: On Feb. 7, Science Debate 2008 sent invitations to the campaigns to participate in an event tentatively scheduled for April. There's been no response yet to the invitation, or to BusinessWeek's queries.
Frustrations with the Current Administration
However, the fact that more than 12,000 scientists have signed onto the effort, along with prestigious organizations such as the National Academies of Sciences, Engineering & Medicine and the Association for the Advancement of Science [AAAS], shows how serious some researchers are about elevating the profile of science in this election. "It's hard to get 12,000 scientists to agree on anything," says Alan Leschner, chief of AAAS and former director of the National Institute on Drug Abuse. "But science is the biggest issue facing modern society, and we are concerned that only one candidate -- Hillary Clinton -- has so far devoted any energy to science."
There's also a palatable hunger in the scientific community for a government that bases its policies on science, after years of decisions from the Bush Administration that they believe ignored scientific reality. "We have all become painfully aware in recent years that it is not only irresponsible but dangerous and expensive to distort and repackage scientific conclusions for political purposes," Otto explained in a recent editorial on the Salon Web site.
A couple of examples: The Bush Administration's conviction that Iraq was trying to build nuclear weapons might not have survived had the White House heeded scientists who pointed out that the aluminum tubes acquired by Iraq [cited as evidence of weapons building] were actually the wrong size for uranium enrichment, says Krauss. Or perhaps the Administration wouldn't have started its $1.2 billion Hydrogen Fuel Initiative if it had asked the National Academy of Sciences for advice first, instead of after. [The NAS was tepid on the idea, feeling its contribution to solving the nation's dependence on oil wasn't as great as the Administration claimed.]
There's no guarantee, of course, that any Presidential Administration will follow the science when the politics point in a different direction. Rice University professor and former White House science adviser Neal Lane recalls how President Bill Clinton backed away from expanding needle-exchange programs, even though the approach had clearly been shown to reduce transmission of AIDS and other diseases from dirty needles.
Consideration and Funding Sought
But rather than expecting firm positions on specific issues, what scientists mainly want now from the Presidential candidates are assurances that the next Administration will at least listen to the science and take it into consideration. "We don't want them to think about one or two hot-button issues, but rather how they would use science to inform decisions, and how they would use science and research to address the country's problems," explains Barry Toiv, spokesman for the Association of American Universities.
The research community, including high-tech companies, also wants the next President to boost funding for science. The main argument is that tomorrow's innovations, economic growth, and America's competitiveness all depend on investments today in research. "Science is not just a nice story," says Krauss. "Our standard of living today [depends] on research done a generation ago."
This argument was laid out in great detail in a recent NAS report, "Rising Above the Gathering Storm." And after strong lobbying by scientific and industry groups, Congress was sufficiently convinced of the need to pass a law authorizing increases in basic research. But it didn't happen. At the end of 2007, the appropriations committees balked at actually providing the money. "We really felt the rug was pulled out from under us," says Robert Spurrier Boege, executive director of the Alliance for Science & Technology Research in America [ASTRA].
The result has been continuing declines in government funding in many areas of science and technology. The fallout has already begun. Two of nation's top physics facilities, the Stanford Linear Accelerator and Fermilab, are laying off staff. On Feb. 12, top universities and business groups will hold a press conference to call on Congress to address the problem.
Some Worry the Effort Could Backfire
Researchers are also hoping a Presidential debate on science would help get this message across. They like some of what the candidates have said so far. [For a summary, see election2008.aaas.org/comparisons.] Hillary Clinton and Barack Obama both support big increases in basic research, along with targeted investments in energy. And like the two Democrats, John McCain promises action against global warming, though he's been silent on most other science issues.
Some experts warn that the effort to inject scientific issues into the Presidential race could backfire. "Anything that gets elevated on the political agenda has risks," explains Lane. It might be better to work quietly behind the scenes, suggests David Goldston, visiting lecturer at Harvard and former staff director of the House Science Committee. Scientists may feel slighted if their concerns are not in the limelight, but a high profile is not always the road to success, he argues. A case in point: Doubling of the National Institutes of Health's budget became a top political cause. But it happened too quickly and with too little care, leading to severe strains now that the budget has leveled off.
There's also the danger that scientists will be seen as just another interest group with its hand out. "The research community needs a more compelling message than 'give us 7% more money than last year,'" says Tom Kalil, special assistant to the chancellor for science and technology at the University of California at Berkeley and former deputy director of the National Economic Council during the Clinton Administration.
Krauss and his partners in the effort to get science higher on the agenda believe they have the right message: Our future prosperity, safety, and health depend on research, he says. We'll soon find out how much the candidates agree with that.
credited by: BusinessWeek
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