Charting Microsoft and Yahoo

Apr 8, 2008: 10:33 AM CST

With Microsoft (MSFT) and Yahoo! (YHOO) in the news lately regarding take-over bids and deadlines, let’s allow cooler heads to prevail by looking at the charts of these two stocks.

It’s clear that Yahoo has been the beneficiary of the latest news, which is the cast most often for potential take-over stocks.

From a low of beneath $19 to a high of $30, Yahoo shareholders certainly welcomed the price behavior following the announcement. On February 1st, Yahoo received a $31 per share acquisition offer, sending the stock just shy of this value on the announcement. Yahoo rejected this deal, and as of yesterday, said it was open to a better arrangement.

According to the above Reuters article, “”Yahoo management’s position is still that Microsoft’s bid is too low and undervalues the company,” said Bernstein analyst Charles Di Bona in a note to clients. “Investors are becoming increasingly skeptical and there appears to be growing concern that this view is both unrealistic and self-interested on the part of Yahoo’s management.”

Yahoo rebuffed Microsoft’s 3-week deadline by declaring “”As a result of the decrease in your own stock price, the value of your proposal today is significantly lower than it was when you made your initial proposal,” Yahoo’s letter said.”

What has happened to Microsoft’s stock since the initial offer?

MSFT closed near $32.50 the day before the proposal was made public. The stock then trended downward and hit a low of $27 before recovering some of the losses.

This is a standard and expected pattern that occurs frequently in take-over negotiations. The stock of the company that is making the offer usually declines (possibly due to concerns of over-spending, etc) and the stock of the company that is being acquired usually rises, sometimes dramatically.

As traders, we have very little information at all regarding possible take-over announcements, and so I suggest that it’s generally a bad idea for new traders to try to anticipate these moves. Consequently, traders should not be discouraged when they miss one of these overnight large price increase moves – remind yourself that there was nothing feasible you could have done to buy the day before and sell the day after the announcement.

If anything, there may be a slightly profitable edge to playing the reaction against these moves, but still due to the large volatility moves that are possible, I would suggest newer traders stand aside and let the more experienced traders take part in such volatile plays.

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