BUSINESS BLOGS
BUSINESS BLOGS
category: business
06 Feb 2008

A lot of interesting observations and analysis coming out today in Microhoogate. The general theme du jour was that Microsoft’s offer for Yahoo! was less enticing today than it was a week ago when it offered $31/share to acquire Yahoo!

Is this accurate? From a purely technical, mathematic perspective, yes. But Steve Ballmer’s volley over the Net was really just the initial foray. Over time, as MSFT’s share price falls, the invisible hand of capitalism will make MSFT look increasingly cheap, and investors will pile in and start to add shares. That means that - much like YHOO’s stock fell and made it cheap and someone bit - pretty soon, MSFT’s stock will come back up to where it was. Yes, there will remain some uncertainty surrounding MSFT’s stock (as there is with all buyers’ stock) but MSFT looks pretty cheap. I might be adding some shares, to be honest with you.

But the bigger question is: will this make MSFT pull the offer?

No. Ultimately, what this week has proven to Jerry Yang and the Yahoo!’s running the board is that Yahoo! has little options, if any.

- Outsourcing search to Google only strengthens’ Google’s hand. Yang’s emotions are blinding him from this little fact: it is Google, and not MSFT, that is Yahoo!’s main competition, both operationally as a company and financially as a stock competing for institutional and individual shareholder demand. For more on this, click here.

- Selling to private equity is looking like a no-go. The credit markets remain spooked and few, if anyone, can justify the cost and revenue efficiencies to pull it off. For more on this, click here.

- NBC has passed, as a partner to MSN, they welcome the influx of new eyeballs. For more on this, click here.

- AOL can’t budge, as Time Warner is itself undergoing some soul searching.

- News Corp.’s done the math? Think again, it has a guaranteed $900M positive cash flow stream from Google, why replace that with a negative $45B outflow in an acquisition of Yahoo!? For more on this, click here.

The point is, when push comes to shove, Steve Ballmer will get on the phones again, and tell Jerry Yang exactly what Yahoo! told Overture when it made an offer that Overture could not resist.

Back in the day, Overture had very little leverage as a provider of paid text links with no distribution. Overture - formerly GoTo.com - was approached by Yahoo! about a sale. Overture initially rebuffed, even asked for more money, but ultimately, Yahoo! (GoTo.com’s largest distributor) threatened to pull a MSFT/Looksmart.

Microsoft had canceled its distribution deal with Looksmart and Looksmart lost the lion’s share of its business’ value. In fact, if Looksmart capitulated on search and became what it is today, it is specifically because of that deal.

In the same vein, Terry Semel politely told Overture that it could tender an offer of $1.5B in order to amicably acquire Overture… or, it could cancel its distribution deal, drastically cut off Overture’s revenue stream, and then proceed to acquire the pay-per-click pioneer for pennies on the dollar.

To his credit, John Battelle brilliantly outlined and chronicled this in his book The Search.

Today, Yahoo! has oodles of leverage more than Overture does, that is for sure, but ultimately, Jerry Yang can take all of the time in the world, but the longer and more difficult he makes this process for Steve Ballmer, Bill Gates, Ray Ozzie and the entire MSFT brass - and YHOO shareholders - then the longer and more painful will the acquisition and integration be.

The danger is: “what happens if MSFT pulls the offer?”  They won’t, because MSFT can smell blood now (hence the “bear hug” strategy) but even if MSFT decides to balk, investors will destroy Yahoo! and force Yang out.  If that happens, then YHOO will be vulnerable to private equity (who will cut even deeper to the bone) or MSFT, for cheaper.

If I were Jerry Yang, I’d go back to Steve Ballmer and graciously thank him for his interest in the company he and David Filo founded. I’d also show a desire to bring Yahoo! back to a competitive level that we have not seen since the Y2K bug was a business threat to Yahoo! and MSFT, but ultimately, I’d ask for $50B buyout price and a commitment to maintain Yahoo! as an independent operating unit that reports to MSFT. For more on that, click here.

Note: Long YHOO