When Microsoft made its surprise $44.6 billion bid on Yahoo last week, the company was offering to pay about 26% over Yahoo's market value—a fairly solid amount of slack to lure Yahoo shareholders. However, as the Sillicon Valley Insider reports, the value of Microsoft's offer has dropped considerably since then.
Microsoft's $44.6 billion offer is actually split up as half cash and half Microsoft shares, with a fixed exchange ratio of 0.9509 Yahoo shares for every Microsoft share, the Insider says. The problem is, Microsoft's share price has dropped from $33 to $29 since the bid was announced, so Microsoft's offer now stands at an effective $29.50 per share. In the meantime, Yahoo's share price has climbed to almost exactly $29 since the offer was made.
According to the Sillicon Valley Insider, Microsoft will need to reset the exchange ratio to get back to the initial $31 a share, which will increase dilution and leave existing shareholders "holding a smaller percent of the combined company." Microsoft shareholders are reportedly unhappy with the deal, and Yahoo is rumored to be looking for a way out by talking to Google.