Finance 101 - Microsoft makes offer to purchase Yahoo

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Posted by Jim on Feb 1, 2008 208 views

Microsoft has made an offer to acquire Yahoo, and the market acts as it always does in these situations - Microsoft has taken a small dip, Yahoo a huge jump and its major competitior Google takes a big dip.

Why does Yahoo jump? The market reaction is based upon the general feeling that the target is a ripe fruit and the market jumps on the wisdom of the offer, feeling that if the buyer is willing to invest cash, absorb debt and commit its resources to the merger or acquisition, it must be serious.

Now for the buyer - if the market things Microsoft is making the right move, why do they dip? - because they are offering to take on more debt, are spending lots of cash, and the management is focused on a merger or acquisition and not on growing the business organically through sales, market or research and development. People do not throw around $44.6 Billion lightly.

Google and their impact - they suffer because the market sees this as the ripe fruit, and now wonders how Google will suffer from the combined might of the buyer and target. As the competition, they will be out of the limelight for some time, seen by some as slow to grab ripe fruit oportunities, and have customers who previously might have left for one of the two competitios, now likely to jump ship for the new opportunties in combined services and sales.

The market price is not just about the value of one company, but the future value and worth of the company compared to everyone else. A $50 dip in the price of Google is not because Google is worth $50 less then it was yesterday. It is because investors want to spend that $50 on different investments in different companies or markets.

The industry sector can also take a hit - people can see this as a long battle not to be ended any time soon, so they sell immediately to take their profits, and move to less violitale markets for the short term.

Investors can invest on the hype, or you can learn to understand the business of the market and invest wisely. Good luck