Short Term Gameplay if MSFT does acquire YHOO

I can only speak about what I am going to do, but if MSFT does acquire YHOO I am buying as many puts on MSFT before their earnings (on the quarter after the acquisition) as I can. Here's why.

To fund the acquisition, MSFT is no doubt going to have to borrow money, they've already disclosed this. MSFT is going to take a hit on the profitability section of earnings reports because of this. What's more, Microsoft's salary expenses just increased by a lot because of the newly acquired Yahoo engineers. Remember those facts.

So if the actual acquisitions happens, we'll be able to tell pretty soon whether the acquisition was worthwhile or not. And I am not talking about what it looks like from the right now perspective, or what the analysts are saying now -- I am talking about whatever product/service/do-dad gets released as the first Microsoft-Yahoo offering. So two outcomes:

1. Not well received. Couple this with the fact that Microsoft had to borrow money for a bad investment, the stock will plummet. How far depends on how much is borrowed, how bad the earnings and guidance are adjusted due to acquisition. Either way it's going down.
2. Well Received. Even if the Microsoft Yahoo acquisition is seen as a worthwhile investment, their earnings are going to take a pounding and they won't be able to guide as high as before since they will have a mountain of debt on the books. So again, MSFT will tick downward.

In either case, MSFT will get pounded which is why I am going with the put strategy. The only way they could not is do the acquisition, take on massive debt, BUT still show monster profitability. That last part I think will be difficult in the short to medium term. Long-term, that's a different story ... MSFT is still a buy in the call direction long term.

For what it's worth, I think MSFT is going in the right direction with the proposed acquisition. They are taking big risks, being bold and aggressive, and especially doing whatever it takes to compete better (even if it means taking on huge debt) ... ah the good'ol days of Microsoft!

--Kevin