The market is reacting very positively: Yahoo is up almost 60% in pre-market trading, at a market cap of $40B (up from $26B at yesterday's close).
Microsoft is down 4% however.
Microsoft is offering $31 per share of Yahoo. YHOO is now trading at nearly $31, up from $19 at the close yesterday.
Why would anyone pay $31 for a share of Yahoo right now? There are two possible outcomes: 1) the deal goes through, and you get your $31 back either in Microsoft stock or cash. No net gain. 2) The deal doesn't go through and YHOO drops back to around $19, losing you about 30%.
Am I missing something?
This rumor is over a year old; it was also first floated around Q1 last year and YHOO's stock price surged that time too. I seriously thought Yahoo was going to sell that time but they didn't. Perhaps this time is different?
It's merger arbitrage.
Buy YHOO, short MSFT. If the merger doesn't go through, then sure, your YHOO stock will drop, but your MSFT stock will gain.
If you get the right proportion of long/short YHOO/MSFT, you make money no matter what happens.
(Where the "right proportion" is really complicated to figure out, and is often wrong.)
Everyone thinks they know so much more than the market. In this thread so far I have seen you claim the stock always goes (slightly) lower than the offer, and another guy express puzzlement as to why YHOO even managed to exceed the offer at times today. I hope neither of you were trading BEA Oracle offered ~6 billion, BEA rejected it, and 3 months later Oracle offered ~8billion and BEA accepted. One other thing to keep in mind (this is more picking on the other guy than on you) is that when these deals are announced they are often largely made up of stock (Microsoft is so buried in cash that might not be the case here). If Yahoo! accepted the offer right now, it still might end up with a different future value. Luckily it is not to hard to factor that out by purchasing various positions or leveraged vehicles in or relating to Microsoft/whoever-the-aquirer-may-be.
Microsoft is sorta uniquely positioned to make this offer at this moment.
(yet another outcome is that Yahoo twiddles it's thumbs and Microsoft rescinds the offer, but in that case you can look forward to getting in on a nice shareholder class-action lawsuit against the board)