Bill Miller's wishful thinking
The value manager wants a better deal for Yahoo. But like so many takeover targets, it has no better offers.
NEW YORK (Fortune) -- Bill Miller could use a reality check.
The Legg Mason mutual fund manager rallied to the defense of embattled Yahoo (YHOO, Fortune 500) this week after Microsoft threatened to lower its $42 billion unsolicited bid. Miller, whose fund was the second-biggest holder of Yahoo at year-end, told The Wall Street Journal he believes Microsoft (MSFT, Fortune 500) is making a mistake by taking an aggressive posture after a two-month-long standoff with Yahoo's board.
"If Microsoft raises the offer, the pressure shifts very quickly to Yahoo to negotiate," he said in an interview published Wednesday. But "if Microsoft lowers the price I'm not prepared to say that's better than Yahoo remaining independent."
Those are strong words - but probably empty ones. That's because like so many of the targets in high-profile takeover deals this year, Yahoo has little leverage to extract better terms from its suitor.
Were Microsoft to yank its proposal, Yahoo might well find its shares trading back around $20 apiece, which is what they fetched before Microsoft stepped in Feb. 1 with a cash-and-stock offer recently valued at $29 and change. In the interim, as Microsoft chief Steve Ballmer pointed out in an exasperated letter this weekend to the Yahoo board, the economy has only gotten weaker, further shadowing Yahoo's already questionable competitive prospects. So while it's not inconceivable that Microsoft would raise its bid by a dollar or two to get the deal done, it's easy to see where the buyer might dig in his heels.
The no-better-offers dynamic is one Miller and shareholders in his Legg Mason Value Trust should be familiar with by now. Miller, whose 15-year run of beating the S&P 500 was snapped in 2006, has been a major shareholder in four big financial firms that have agreed this year to sell themselves or deal substantial minority stakes at huge discounts to recent trading prices (see corrrection). Along with a 7% stake in Yahoo, Legg Mason Capital Management owned 12% of Countrywide, 4% each of Bear Stearns (BSC, Fortune 500) and Thornburg Mortgage (TMA), and 1% of Washington Mutual (WM, Fortune 500) at year-end, according to LionShares.com.
Those ill-timed bets on a financial sector recovery help to explain why the $12 billion Value Trust turned in its worst-ever performance in the first quarter, according to Bloomberg, with a 20% loss. Countrywide (CFC, Fortune 500) is the struggling mortgage lender that agreed in January to sell itself for $4 billion in stock to Bank of America (BAC, Fortune 500). Bear Stearns agreed last month to sell itself to JPMorgan Chase (JPM, Fortune 500) for $1.2 billion in an emergency sale brokered by the Federal Reserve Bank of New York. Thornburg is the jumbo lender that sold a 90% stake in itself to outside investors last week to stave off insolvency. Washington Mutual set plans Tuesday to raise $7 billion in a sale of stock to investors led by private equity firm TPG.
In each case, the company that sold itself did so because of worries about its financial health. Given those circumstances, each firm had little choice but to take the deal it had in hand. David Merkel, chief economist at broker-dealer Finacorp Securities, writes on his Aleph Blog that the Washington Mutual and Thornburg deals are examples of "last-ditch financing methods" that speak to the firms' "desperation" to raise money.
Yet some shareholders, including Miller, ignore this hard truth. Take Miller's Feb. 10 comments on Countrywide in a letter to Value Trust shareholders.
"We were quite surprised by the decision to sell the company at close to a seven-year low in the stock price, and agreeing to a bid that amounts to only 30% of book value and under 3x consensus earnings for 2009," wrote Miller. "What makes the decision puzzling is that the company was seeing solid deposit growth, has no apparent capital problems, was not forced by the regulators to seek a merger partner, and is in sufficiently sound condition to have declared its regular quarterly dividend at the end of January."
Of course, not everyone was equally puzzled, as illustrated by the 14% decline in Countrywide's stock since Miller issued his letter. And of course, Miller may simply be talking his book. In both the Countrywide and Yahoo cases, Miller's comments are understandable because he and his shareholders stand to benefit from a higher offer. But that doesn't mean one is on the way.
Correction: An earlier version of this story erroneously reported that fund manager Bill Miller's 15-year streak of beating the S&P 500 ended last year. The streak ended in 2006, though returns at his Legg Mason Value Trust lagged behind the S&P 500 last year as well. Back to story.