Rumor has it that MSFT offered YHOO $56/share back in 2006.
I’m not sure it’s true or not, but since then, both MSFT and YHOO have lost share to Google in search market share. YHOO has bought Right Media, Blue Lithium, Flickr, etc., and MSFT itself has acquired aQuantive. In other words: yes $56 is a bit out of reach, but $31/share is a tad too low.
But, let’s face it, no one will come close to paying nearly as much, let alone more. If I were Jerry Yang, YHOO’s CEO and co-founder, here’s what I would say to MSFT:
“Our stock has traded at $34 as early as November 2007, and as high as $40 as early as January 2006. You are offering $31, which means that net of Alibaba and Yahoo! Japan, you are valuing us at $10-$15 or so, or $12B-$20B in market cap.
We’ll sell, because we realize at this juncture it’s inevitable. But, we can do this the easy way, or the hard way. You have until March 13th to nominate board members, and you cannot call a board meeting until our annual shareholder meeting. Lastly, while we recognize it will cost us our jobs, we do have a poison pill we can trigger.
Sure, there’s Google who can pay us billions to power our search, but that will only make them stronger… and even considering it will cause your lobbyists to bitch to the government, so let’s try to avoid deal purgatory and call it a deal at $50 market cap, or just north of $40/share.
$25B in cash + $25B in stock.
Deal? Or no Deal?”
What do you say gents?
Note: long YHOO
Note: Long YHOO.
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WatchMojo NewsletterRupert Murdoch confirmed during News Corp.’s analyst call that he was not planning on bidding on Yahoo!
No wonder: Google is guaranteeing him $900M via Fox Interactive Media. Yahoo! used to power those very same text ads via Overture and when the deal came up for the right to power MySpace’s search, Yahoo! did not even lobby for the business.
Translation: Yahoo! would never be able to generate that kind of return for him.
Does Murdoch wish he could get all of Yahoo! for 25% of MySpace? Of course.
But is he crazy to trade off $900M in guaranteed revenue from Google to instead acquire Yahoo! for $45B?
Are you crazy? Frankly, Murdoch is so smart that he welcomes a MSFT acquisition of YHOO. Why? Because it makes Google price MySpace’s inventory at a premium.
Update: I am relinking to a post I did when the deal was announced analyzing whether or not Google overpaid.
With Google making overtures to Yahoo!, it’s worth asking who has been buying up Yahoo! shares since Friday morning.
With the stock being at less than $19 come Thursday close time, the stock zoomed up $9 at the open Friday morning… I believe over 440M shares exchanged hands on Friday. Bear in mind YHOO’s average shares traded in a day was about 40M. Today, in one day, over 90M have already exchanged hands. That brings the 2-day total to 530M.
Yes, with the tender offer being at $31/share, there is plenty of room for merger arbitrage traders to make plenty of money… but could it be that MSFT is already using its $20B cash hoard to be buying up shares in preparation for a proxy showdown?
$20B in cash would get you (even at $29/share) about 689M shares.
I doubt this is the case, but if MSFT has been aggressively buying up shares from anyone that has sold (and fearing something like an anti-trust ruling, a competing PE bid etc.) it is possible that many shareholders took advantage of the short-term relief the stock got to cash out.
Yahoo! has approximately 1.25B shares outstanding. Assuming (big if) MSFT has bought up all of those shares, that would already give MSFT 55% of the shares. Yes, Yahoo! has a poison pill provision… and this aggressive share buying would make that moot.
Remember one thing: MSFT could have easily bought the shares via third-parties in order from avoiding having to disclose any of this. This is how Jana Partners build up a sizable chunk of CNET stock. If this is the case, then imagine if MSFT has been building up a position in Yahoo! all throughout 2008 and this is, in fact, what they only bid $31/share.
I could be wrong and probably am, but for a moribund stock with a passive management strategy, Yahoo! sure is providing us with a great storyline these days.
During last week’s analyst call, I stated that Jerry Yang, Sue Decker and Blake Morgensen seemed to be describing another company, because from my vantage point: Yahoo!’s senior management had lost the last shred of credibility they had.
It led me to conclude that these people were either incompetent or dishonest, or both. It then led me to think of Warren Buffett who always looked for management that was candid, be it with shareholders or employees.
Last week, Yang, Decker and Morgensen were not honest with shareholders… and by totally mismanaging the layoff rumors/announcement, they were not candid with staff too.
It is thus interesting to see how Yang reacts to MSFT’s offer in a memo to employees. Allow me to stress that Yang seems like a very nice person who is trying to protect his employees. The man’s is a legend of the Web. But having had no one report to him for over a decade and then walk into a nightmare scenario was an attempt to emulate Steve Jobs. Yang made a mistake my mismanaging expectations with that 100-day assessment period. In his defense, he never said any action would take place in said period, he just suggested that he would look at things. But ultimately the market reversed momentum and Yahoo! began to face headwinds.
This is more about managing a publicly traded company than it is about managing Yahoo! I’ve been harsh on Yahoo!’s management (which includes Yang obviously). I just think that the longer Yang tries to fight the inevitable, the longer this drags out, creating uncertainty for employees who are clearly dusting off resumes and connecting with their networks to see who is hiring for what position.
Yang should be candid with staffers: this MSFT takeover attempt is the greatest challenge the company has faced in its history. It is a greater challenge than the battle against Google, which Yahoo! lost. Yang should not get all of the blame himself, that is for sure, but before suggesting that YHOO has many options (You Have Always Other Options, he once told Mark Cuban) he should analyze history to see how Yahoo! came out of the Google battle and ask himself if Yahoo! stands a chance to survive and thrive against this challenge (of a different kind) by MSFT.
It seems to me that YHOO was on a more solid footing in 2000 when the Google machine ramped up; much the same way that YHOO inadvertently helped Google by showcasing Google’s search on Yahoo!, it might be helping make MSFT’s bid to acquire it easier…
One of the other arguments in the “YHOO should remain independent”camp is that Yahoo! Asian Alliance Agreement.
In essence, it argues that Yahoo! can somehow:
1- spin off Alibaba and / or Yahoo! Japan.
The problem here is that such sales would not be tax-free. The company can look into something called the Morris Trust act, but good luck there. We’ve been introduced to the Anti-Morris-Trust act to deny exactly that kind of move.
But the bigger issue is the argument they juxtapose to this strategy, which is
2 - Yahoo! should outsource search to Google.
Now that’s crazy talk. Here’s why:
Google’s ascendancy to become this mammoth online advertising juggernaut came precisely because in 2000 Yahoo! decided to use Google as its default search engine. Eventually, Yahoo! realized this was a catastrophic move and stopped that by buying Inktomi (for organic search algorithm) and Overture (for paid listings) but it was too late.
By opening up search to Google on the world’s biggest market (the US) on the world’s biggest property (Yahoo!), Yahoo! handed the world to Google on a golden platter.
Anyone who today argues that Yahoo! should hand off its search (again) to Google is essentially biting off their nose to spite their face. In other words, one of the only things that Yahoo! has going for itself is its relative (to Google) strength in Asia.
By giving up search real estate to Google in Asia - today the world’s fastest web market - Yahoo! would only show how dumb they really are. In other words, this would only make Google stronger. In fact, it is this strength that will make a MSFT/YHOO deal go through because Google is so strong that it can allow itself to underwrite such a move.
As I have said: so long as Google and Yahoo! are comparables on the stock market, Google will outperform because it is a faster growing stock with a dare-I-say-it better management.
Fred Wilson suggests ways for Yahoo! to remain out of Redmond’s grip. Fortune runs with that prognosis, too. Yesterday, Henry Blodget tried to offer alternative suggestions, too.
Here’s what Wilson concludes:
So Jerry and the Board of Yahoo! should resist the bear hug and split up Yahoo! instead. It’s the right thing to do for the company, it’s the right thing to do for the shareholders, it’s the right thing to do for the employees, its the right thing to do for the web services that Yahoo! owns, and most of all its the right thing to do for the users of those web services.
Fred is one of the most respected VCs on either coast and a real good guy that gives VCs a good name, but, with all due respect, his vision is blurred by his bias as a VC to have one more potential exit option.
Here’s what I think, from my vantage points (not a VC):
- As a new media executive: I think Yahoo is unable to cut deals quickly due to a lack of technology automation, a lack of direction, consistent change of the guard, revolving doors at every position. They have a fantastic array of assets, but they need to be in a rush and hustle. I don’t see that from the front lines.
- As a shareholder: what does it say that shareholders are ecstatic about an [initial] offer of $31 per share when this is neither a 52-week high let alone a post-dot-com-recovery 5-year high. We as shareholders have largely lost faith in the senior management of Yahoo! Jerry Yang seems like a genuinely smart, able, honest, nice and cool person, but a CEO he is not. Of course, it does not help that he became CEO of a company in disarray, but that is what Yahoo! is. Microsoft, on the other hand, as executed in its core divisions at a breakneck pace and as much as it is embarrassing to hear Yahoo! executives say “gosh, we’re surprised MSFT went public with this” we’re quite impressed by the fact that MSFT has the bravado and vision to go public with this.
Most importantly, so long as Google will have YHOO to surpass as its stock comparable, then Yahoo! will fare poorly.
I have reservations about what MSFT would do, but I suspect MSFT will largely do to YHOO what it has done to aQuantive: not much. MSFT is not looking to prostitute Yahoo! and make it a platform to roll out cloud computing services, it’s simply looking to duplicate its online advertising revenue streams to match the streams of Windows and Office. There is nothing wrong with that.
- As an analyst: what MSFT is doing here is leveraging its balance sheet to spruce up its income statement and kickstart growth. This is smart for MSFT. It generates $12B in free cash flow each year, has $20B of cash on hand, no debt, even if it must go into debt (I suspect $10B of debt, of which $5B will be used for the deal and $5B will remain on hand) it can get a really high grade and repay it within the year! By adding YHOO’s $6B revenue stream to its income statement, MSFT adds 10% to the top line and probably a lot more to its bottom line.
- As a user: I have been using My.Yahoo since 2000. I stopped using it this year when they relaunched it and it was buggy. I have not logged in into Yahoo! mail and use Gmail. As I spend more and more time on Google services I found myself asking “why do I still root for Yahoo! then?”
It then became clear: Yahoo! has a short/mid term problem and it is all about people. People come and go. Long term, Yahoo! can do well and will survive. It’s a shame that Yahoo!’s employees, management and even existing shareholders might not see to live the upside.
As a VC, I would hope that Fred Wilson et al. understand that if a company’s people don’t get the job done, they need to step aside and let others get the job done.
Even if Yahoo! decides to do all of these wonderful things, existing Yahoo! shareholders doubt that Sue Decker et al. will deliver.
Put more bluntly, the only way I would vote for anything other than a sale to MSFT is if the landscape at the top (CEO, President, SVP, EVP, VP) was materially different. I am definitey NOT saying that Yahoo! has no competent and smart people at the top, bottom or the middle; I am just saying that for the past 3 years, Yahoo! has not been a place where the best and brightest excel or are rewarded. What’s that saying “A players hire A players, B players hire C players, etc.”
With 15,000 employees, all it takes is 10 or 20% of B players for the place to rot.
Ultimately, when you run down the different pros and cons, it is overwhelming positive for MSFT and YHOO merge.
Part of Microsoft’s argument to the anti-trust crew is that Google has grown to be too strong, and that an acquisition of Yahoo! would help create a strong #2.
In fact, even ardent Google fans and MSFT critics agree that we need a strong #2 to counter Google’s dominance online. We all respect and admire Google but let’s face it, to quote Cooper Anderson, we need to keep Google honest.
Anyway, this morning I wake up and see that having lead counsel David Drummond voice his concerns was step 1. Apparently, Eric Schmidt is going to go all out to try to wrest Yahoo! away from Redmond, or at the very least, help them remain independent.
As a Yahoo! shareholder, I am not sure if I care about Yahoo! shifting its search to Google anymore, that seems like way too little, way too late. I think YHOO + MSFT is a better answer for shareholders’ needs. But regardless of all that, I have some word of advice for Eric and Google:
It is specifically this that MSFT will play off to get approval. The fact that Google can show up, sign a blank check for $2, 3… who knows $5B in guaranteed revenues to boost to its market share is a cause for concern.
Google is a ferocious operational contestant in this battle, but Microsoft has proven adept at deal-making prowess. By opening the bid at $31 / $44.6B in market cap, MSFT is leaving more than enough room to up the bid, as we suggested might happen earlier.
Note: Long YHOO
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