While driving would have offered more freedom and the chance to crank up the CD player, I didn’t fancy paying the equivalent of $9.75 a gallon for gasoline, in addition to rental charges. So although the train was hardly cheap – £90 ($176) for the return trip from Southampton to Liverpool – it was much easier on the wallet. Particularly a wallet already getting hammered because of the awful dollar-pound exchange rate.

Yes, Britain is still in the same shape as the last time I went: Bloody expensive! But although it’s enduring several similar economic problems as the US, that hasn’t stopped a significant Anglo-American corporate merger…

Fine With 5… For Now

Having cut interest rates three times since December – from 5.75% to 5% – the Bank of England’s Monetary Policy Committee decided to hold fire this time around.

But with more bad economic data this week, many don’t expect the status quo to last long. In fact, the bankers could chop again as soon as next month. Consider this:

• The Chartered Institute for Purchasing and Supply said the British service sector grew at the slowest rate in five years in April.
• The Office for National Statistics reported that Britain’s manufacturing sector output dropped 0.5% in March – the worst performance in six months.
• The number of mortgage lending approvals has halved over the past year, leaving many homebuyers unable to get financing at an affordable price. In addition, the number of first-quarter home repossession orders shot up by 17% over Q1 2007.
• First quarter GDP growth crawled in at 0.4%, compared with the 0.6% rate over the final three months of 2007. It was the weakest quarter-over-quarter growth rate since the first quarter of 2005.

Like the Federal Reserve, the Bank of England is trying to balance poor economic data against high inflation. The current UK inflation rate is 2.5% – 0.5% higher than the government’s 2% target.

And with the British Retail Consortium reporting that food costs are up 4.7% over this time last year, British households are now spending almost one-third of their income on food and bills. One possible reason why the bank left rates unchanged is because it fears a poor inflation number next week and another cut would make it look irresponsible.

Britain Following In America’s Footsteps… And The Bankers Are Divided

Many economists agree that the UK economy is mirroring the US – and with its performance just a few quarters behind the US, the current situation could get worse.

That’s a view shared by Bank of England’s most dovish monetary policy board member, David Blanchflower, who favors low interest rates over a potential inflationary spike. He says the risk of not being more aggressive with rate cuts could send the UK economy down the same rocky path as America, triggering a sharp economic downturn.

But at least the Bank of England has one advantage. Having seen how the Fed has handled the crisis, it has a better idea of what steps to take to avoid a similar blow-up.

However, the April meeting showed the bankers are split. While six of the nine members favored the interest rate cut, two voted for no change and one (Blanchflower) wanted a larger chop to 4.75%.

While they debate, though, Britain’s stock market has actually performed well over the past few months. In fact, since the Bear Stearns mess caused global turmoil on March 17, the FTSE-100 index has risen around 800 points – as you can see on this chart.

And eager to tap into that strength, one of America’s big boys just came knocking…

The “Best Buy” For America’s Biggest Electronics Retailer

With a 20% market share, Best Buy (NYSE: BBY) is already winning the battle against the likes of Circuit City (NYSE: CC). But the world’s largest consumer electronics retailer just strengthened further by beefing up its international presence.

The firm announced on Thursday that it will spend $2.1 billion to acquire half of British mobile telecommunications company Carphone Warehouse (CPW.L). Having already worked with Carphone Warehouse for two years and bought a 2.9% stake in the firm last year, this deal will now see Best Buy add to Carphone’s existing 2,400 stores and take its large, superstore-style US shops to the UK and Europe under the Best Buy brand name in 2009.

For Best Buy, it’s a lucrative opportunity to tap into Europe’s annual $175 billion consumer electronics market. And rather than trying to crack the European retail market by itself – a move that has proved tricky for other US retailers – it’s teaming up with an already dominant, well-established company (Carphone was founded in 1989) that has the experience, expertise, and strong brand. In addition, Best Buy will take its successful Geek Squad in-home technical support team to Britain.

Moreover, with the high profit margins in the mobile phone market, the partnership will add $5 billion to Best Buy’s fiscal 2009 revenues and 5-9 cents in earnings per share.

That’s on top of the 11.4% sales jump to $40 billion in Best Buy’s last fiscal year, which produced earnings of $1.4 billion, up 2.2%. The firm also offers a $0.52 annual dividend per share (1.2% yield) to shareholders.

So what about the other side of the merger? And how are investors reacting to the deal?

Investors Are Non-Plussed Now… But This Deal Should Pay Off Later

Judging by the share price action of both Best Buy and Carphone Warehouse, you’d think it’s a bad deal. Investors have bailed on the shares over the past couple of days.

Obviously, there are risks – not least of which being the fact that consumer spending is currently slowing as inflation rises and demand for high-end electronics has cooled

But ultimately, I believe it’s actually a good move for both sides. In Carphone’s case, the firm gains access to Best Buy’s hugely successful, proven model, which should give it a healthy boost in the ultra-competitive UK telecommunications and electronics market.

But the tough times are just beginning for Yahoo, which must now prove why it is worth more than the lofty price Microsoft was offering.

“Yahoo is going to be under a lot of pressure,” Peter Falvey, managing director at technology-merger adviser Revolution Partners, told Bloomberg News. “A lot of shareholders are going to say, ‘Hmm, maybe we overreached.’”

Microsoft originally offered $31 per share in either cash or Microsoft stock, a 62% premium to Yahoo’s Feb. 3 closing price. It boosted the bid to $33 a share, appraising Yahoo at approximately $47.5 billion, but Yahoo refused to accept anything less than $37.

Now, at $24 a share, Yahoo as a company is only worth about $33.5 billion.

That means Jerry Yang, Yahoo’s co-founder and chief executive, has the unenviable task of delivering better performance after Yahoo’s bold reprisal. In short, he’ll have to add at least $14 billion in market value to the company if he’s going to justify his decision and prove that rejecting Microsoft’s offer was the right move.

And one doesn’t have to take a very long look at Yahoo to see Yang has his work cut out for him.

Why Yahoo! Isn’t Worth $37 a Share

Last month, Yahoo reported a first-quarter profit of $542 million, or 37 cents per share, up from $142 million, or 10 cents per share last year. It was the company’s first profit increase in nine straight quarters (more than two years). But a big reason for the jump was a one-time gain of $401 million – a windfall from the sale of Yahoo’s stake in Alibaba.com Ltd.’s (PINK:ALBCF), which came from the Asian Internet company’s initial public offering (IPO).

Excluding one-time items, Yahoo reported earnings of 11 cents a share.

Even with the profit increase, the company continued to lose market share to nemesis Google Inc. (GOOG), the leader in Internet search. Yahoo accounts for 21.3 % of all U.S. searches according to comScore Inc.

That compares with a near 60% sway for its rival, Google, which defied Wall Street’s first-quarter expectations by expanding its revenue nearly four times faster than Yahoo. While Yahoo’s sales climbed 14% last quarter, Google posted a 46% jump in revenue. In April, Yahoo all but acknowledged Google’s victory by outsourcing a small portion of its search advertising to its competitor on a two-week trial basis. If Yahoo continues using Google’s search advertising system, it will be abandoning its own “Panama” ad system. Launched in February, the Panama initiative set the company back millions of dollars. Even so, it continues to lag behind Google’s AdSense in terms of revenue per search query.

As it worked to bulk up its search capabilities, Yahoo had earlier shelled out $1.63 billion for Overture Services and $235 million for Inktomi. That’s close to $2 billion for search engine service specialists that would for, all intents and purposes, be rendered moot should Yahoo ultimately outsource even more of its search-related business.

While some analysts believe a bigger deal with Google may already be in the works, any serious collaboration between the United States’ two largest web portals would very likely run afoul of U.S. antitrust restrictions. Google already places ads on more than 67% of searches. The addition of Yahoo would expand its influence to 89% of searches, according to statistics from Hitwise. Microsoft said last month that Google would command more than 90% of the search advertising market.

“While Yahoo may pursue a Google search partnership as a way to appease shareholders through enhanced cash flow, we believe such a deal would face intense anti-trust scrutiny,” Clayton Moran, an analyst with Stanford Group Company, told IDG News Service. “In addition it would cede control of search to Google.”

Moran does not believe Yahoo’s stock will reach the $37 a share value over the next 12 to 18 months.

There have also been rumors that Yahoo will join forces with Time Warner Inc.’s (TWX) AOL or News Corp.’s (NWS) Fox Interactive Media business units. According to the details that have emerged so far, Time Warner would merge a large portion of AOL’s operations with Yahoo and make a cash investment in exchange for a 20% stake in the resulting company. Yahoo would use that cash infusion to buy back some of its own stock.

However, when it comes to Web-search market share, AOL currently ranks fourth, behind Google, Yahoo and Microsoft. So the company that emerged from that combination would be more of a content player than it would be a competitive Web-search firm.

Regardless of what Yahoo does to try to validate its decision to rebuff Microsoft, investors are already working themselves into an apoplectic frenzy over the move. Some Yahoo shareholders had already sued the company’s directors even before Microsoft decided to walk.

Enraged Yahoo shareholder Eric Jackson said Sunday that he planned to rally shareholders to withhold their votes from all Yahoo directors at the company’s annual meeting, which has not yet been scheduled. Jackson leads a group of about 140 shareholders who together own 2 million Yahoo shares.

“Significant value was left on the table,” said Jackson, who heads a group of irate investors who together own about two million Yahoo shares.

Microsoft’s Next Move

In an ironic twist, Microsoft – like Yahoo – must now answer to a less-than-thrilled constituency.

Microsoft Chief Executive Steve Ballmer said April 24 that his company was willing and able to walk away from its bid for Yahoo.

“We’re prepared to move forward without a merger with Yahoo,” Ballmer said at a technology conference in Italy. “We think the best way to move forward quickly is to come together with Yahoo. Hopefully that works. But if it doesn’t, we go forward. Time is money.”

He lived up to his word Saturday, scrapping his company’s a $47.5 billion offer that valued Yahoo shares at a 70% premium to their January value after three agonizing months.

But now the man in charge of Microsoft must explain how the company plans to improve its eroding Internet business – which lost $228 million in the first quarter alone – without Yahoo.

Instead of the stock-price rally that many companies enjoy when they walk away from costly deals, Microsoft’s shares closed the day yesterday at $29.08, down 16 cents – hardly the vote of confidence the company would have wanted to see.

Since the company obviously has plenty of cash on hand, it may be a good idea to seek out a more agreeable partner.

“I’m looking for Microsoft to get aggressive with a buying spree,” Gartner analyst Allen Weiner told IDG. “I think Microsoft should do something quickly to show the world that [the] Yahoo bid wasn’t a setback.”

The company could try to strike a deal of its own with Time Warner or News Corp., or perhaps even with the trendy Facebook.com. Other analysts suspect Microsoft may be beckoned back to Yahoo’s rescue if the company fails to right its course by year’s end.

“Should Yahoo miss expectations in 2008, we would not be surprised to see MSFT come back to the table,” RBC Captial analyst Ross Sandler said in a report yesterday morning.