Well, well, well. It appears Microsoft’s (MSFT, $29.24, down $0.16) Steve Ballmer is not a man of his words. For someone who had said that Microsoft wouldn’t raise its offer for Yahoo (YHOO, $28.67, up $1.86) because the original offer was “fair”, Mr. Ballmer is now willing to pay not a “dime above” but $2 more to get a deal done. I say “not a dime above” because that is what he had said on Thursday.

Talk is cheap and while the news is good for Yahoo’s shareholders it lowers the drama factor. Not that I was hoping for Yahoo’s stock to drop or anything but it would have been (and still could be) interesting to see what would’ve happened had Microsoft walked away. Nothing is official but this brings the two that much closer.

Like something out of Hollywood both companies have followed the script to a “T”. But like any movie that drags on after an exciting start most people just want the thing to hurry up and be over with. Yahoo was up another $1.03 to $29.70 in after-hours trading while Microsoft shed another 12 cents.

Rick Rouse
Rick@OptionsMentoring.com

The weekend has come and gone without a deal getting done between Microsoft (MSFT, $29.83) and Yahoo (YHOO, $26.80). Microsoft had given Yahoo’s board of directors until Saturday to agree to its proposal or face a the possibility of a tender offer and proxy battle. Although Microsoft hasn’t revealed its next move, I would expect some kind of response within the next day or two.

The stakes are high for both sides and Microsoft has already hired a major proxy solicitation firm. It has also been reported that the company has prepared its own board of directors to replace Yahoo’s board, so we’re likely to see Microsoft pursue the deal.

On the other hand, questions abound as to if this deal is what’s best for Microsoft. It has been leaked that Microsoft’s higher executives do not want this deal to go through and mergers are always a tough thing to get done anyway.

If Yahoo is successful in fending off Microsoft then shareholders are going to want to see results. Will Yahoo’s stock hold up if Microsoft walks away and what will happen to Microsoft’s shares?

In the meantime, the one company that is benefiting the most is Google (GOOG, $544.06) which is the same company that both Microsoft and Yahoo are trying to catch.

Rick Rouse
Rick@OptionsMentoring.com

The clock is ticking on Yahoo (YHOO, $26.59, down $0.71) to accept Microsoft’s (MSFT, $29.73, down $2.07) bid. The deadline is Saturday and we’re likely will see some high action drama. The stakes are high for both sides but the real pressure is on Yahoo which really has no other options.

If Microsoft doesn’t get a deal done the company could go “hostile” with its bid. A takeover is considered “hostile” if Yahoo’s board rejects the offer and Microsoft continues to pursue the deal or if Microsoft would have made a bid without informing Yahoo’s Board beforehand then it would also have been considered a hostile takeover bid.

So what does this all mean? Yahoo’s isn’t opposed to a merger but wants a higher price. Both companies reported less-than-stellar earnings results so there is no leverage there on either side. Microsoft has said it will not raise its offer and Yahoo wants a higher one. It looks like its going come down to who’s word is the strongest and I’d go with Microsoft.

If that happens, then Yahoo could fall below $20. If Microsoft pulls out or goes hostile its stock could also slip as well. Here’s where it gets really interesting. The put volume in Yahoo is exploding and we are only halfway through the trading session.

Take a look at the action in the Yahoo May Puts:

May 25 Put (YHQQE, $1.04, up $0.40) up 63%, 32,000 contracts traded
May 22.50 Put (YHQQX, $0.54, up $0.24) up 70%, 16,000 contracts traded
May 20 Put (YHQQD, $0.24, up $0.12) up 100%, 23,000 contracts traded

Before I close, let’s throw this out there. What if Microsoft pulls out of the deal sending Yahoo’s shares down below $20? If that were to happen the stock could fall even further to the low to mid-teens where Microsoft could then aggressively buy Yahoo’s shares in the open market for half the price.

I can’t wait to see how this all unfolds.

Rick Rouse
Rick@OptionsMentoring.com