One on One with David Garrity, Director of Research at Dinosaur Securities
Thursday, April 24, 2008
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SUSIE GHARIB: Joining us now for more analysis, David Garrity, director of research at Dinosaur Securities. Hi, David.
DAVID GARRITY, DIRECTOR OF RESEARCH, DINOSAUR SECURITIES: Good evening.
GHARIB: Well, let's talk about that Microsoft bid for Yahoo! What did the company say on the analyst call this afternoon about whether or not they are going to go for this deal or not?
GARRITY: Well, the CFO said that the company has -- the company Yahoo! has unrealistic expectations of their own value and certainly is giving strong indications that they will pursue a hostile bid at a lower price.
GHARIB: So do you think that Microsoft at some point wants Yahoo! enough that it will raise its offer and just to get the deal done?
GARRITY: Well, the fact that you are looking at Microsoft's own online services business in the quarter as continuing to lose money, that business for them is unprofitable in strong contrast to the profits that Yahoo! earns, as well as Google earns. And to the extent that Microsoft needs to have the scale, we believe that Yahoo!, the acquisition of that company is a strategic necessity for Microsoft.
GHARIB: So can Microsoft afford not to get Yahoo!? I mean what happens if they walk away from the deal?
GARRITY: Our view is that, you know, some of the issues that Microsoft had in their core software business reflects the difficulties with Vista. It says the company does have to transform their business model. Microsoft right now does have the financial resources if they so choose to pay the same price that they offered for Yahoo! earlier, as well as perhaps even raise the bid more.
GHARIB: David, what if Microsoft does get Yahoo!? Does the combined combination of these two companies have the firepower to take on Google?
GARRITY: We think that it will. The issue for Microsoft is going to be trying to motivate and retain the Yahoo! workforce as well as also manage their own employee ranks. There are differing expectations on both sides. But the two companies on paper put together would have the largest audience online on the Internet and arguably be in a much stronger position to work with advertisers and thus gain share as advertising dollars continue to move towards the Internet.
GHARIB: David, let's talk a little bit about these quarterly numbers that came out and more importantly the outlook. Investors were disappointed by the outlook for the fourth quarter, the current quarter. What was your reaction?
GARRITY: Our reaction is if you look at those core businesses in terms of servers as well as those of particularly the Windows platform which arguably have had very, very high-profit margins for Microsoft historically, the fact that those profit margins fell is something of a concern. And obviously the company's guidance for the June quarter would seem to indicate that they don't see that margin pressure lifting any time soon.
GHARIB: Do you think that the sell-off in the stock today was justified in after-hours trading down about five percent or so?
GARRITY: Well, if there is trouble in terms of Microsoft's core software franchise, if the monopoly is coming under question, yes, that would have a significant valuation that would justify the sell-off we've seen.
GHARIB: So for people who own the stock or don't own the stock, what would you recommend?
GARRITY: I would argue that Microsoft is going to be a strong factor. They continue to have a dividend. They do have technology exposure. Tech is a strong sector in the market. We think that Microsoft may not necessarily lead the tech sector, but will certainly follow along with that and if we see a better economy in the second half of this year, we think that tech is going to be leading that rally so Microsoft should be in that pack.
GHARIB: David do you own Microsoft stock or do you have any other disclosures that you need to tell us about.
GARRITY: No. We have no ownership of Microsoft.
GHARIB: David, thanks a lot for your analysis, appreciate it.
GARRITY: Thank you.
GHARIB: My guest tonight, David Garrity, director of research at Dinosaur Securities.
