The Yahoo Crossover Vote

More than half of Yahoo's shareholders also own shares of Microsoft. That high degree of cross-ownership has generally been seen as a potential barrier to a deal. For while those shareholders' Yahoo half may want to get more than the $31-per-share in cash and stock that Microsoft is offering, their Microsoft-owning side does not want the software giant to pay any more.

Now, a top Wall Street analyst has offered a contrarian view. Ben Schachter, an internet analyst with UBS, contends that the merger is in the best interests of a majority of those who hold shares in both companies, even at a price higher than $31 per share.

"Our analysis indicates a majority of Yahoo shareholders that also own Microsoft would be net beneficiaries of a raised offer," Schachter wrote in a note to clients, adding that "the issue of cross-ownership may be a bit counterintuitive."

"In the end, we believe it will likely not be an impediment to a deal being done, and in fact should be a positive."

The important point is that although cross-owners own more Microsoft shares in absolute dollar terms, they own a higher percentage of outstanding Yahoo shares than they do of Microsoft shares.

"We analyzed publicly available ownership records for both companies, and determined that a majority of Yahoo's ownership (that also owns shares of Microsoft) should, in theory, see an increase in the overall value of their investment were Microsoft to increase its bid for Yahoo from the original $31 per share offer," said Schachter, adding that as a result of Microsoft's recent drop in share price, the current value of the deal is $28.60 per share.

Among the top cross-holders that stand to benefit from a higher bid are Legg Mason, Capital Research, Citigroup, and Vanguard, according to Schachter. (See a list of the top holders here.)

Schachter estimates that almost 69 percent of Yahoo's outstanding equity is owned by shareholders that also own Microsoft stock, compared with 63 percent cross-ownership for Microsoft stock.

Assuming Microsoft raises its bid for Yahoo by a total of $10 billion, Schachter wrote, "we estimate that approximately 52 percent of Yahoo's equity ownership that have positions in each company's stock would see a net gain in terms of absolute dollars. This is due to cross-owners owning a larger proportion of Yahoo's total equity value than of Microsoft."

(See his chart here.)

"The remaining Yahoo stockholders would see a net loss or virtually no change in theoretical value," Schachter wrote. "Our analysis assumes that Microsoft overall market cap declines by an amount equal to its raised bid, but we note that any compression of Microsoft's valuation beyond that may make a deal less attractive for cross-owners. In addition, if we assume that the owners of the 16.5 percent of Yahoo shares that do not own any shares of Microsoft also support a raised bid (which we expect they clearly would), then we estimate that approximately 68.4 percent of Yahoo's total shares outstanding would support a higher offer."

Sam Gustin