Once in a while I post these kind of “coming up” posts… anyway, coming up over the next days and weeks, amongst others:
- The only 2 people you should listen to or care about: your clients & the market.
- Should the CEO of a publicly traded company ever listen to investors?
- Should the CEO of a privately held company ever listen to investors?
- Is a board useless or useful?
- Top indie bloggers / one-man blog operations.
- Top big company blogs
- Why is CBS listening to the Valley echo chamber?
- Change of strategy at Disney re: Distribution?
- Hulu’s End Game. How analysts are missing the point on the NBC/News Corp. JV
- Video Industry Million Dollar Club
- Memo to VCs: Appoint some Sales Guys as Partners
- Your top lieutenant: your balls.
- Did MySpace Deal Help Rupert Murdoch Beat Sumner Redstone Once and For All
- WTF is With all of the Ad Networks?
- WTF is With all of the Virtual Worlds?
- Douchebag alert: May 9th 2006… A Day of Infamy Revisited.
All right, there’s more than 10 here.
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WatchMojo Newsletter“Put the bong down, the honeymoon is over” is the only message I can walk away from this news that eBay is suing Craig Newmark and Jim “master of my domain” Buckmaster of Craigslist.org (for the record I think Jim was right to ask for the craigslistblog.org domain, but wrong the way he handled it). But that was so last week, this week it’s not bloggers, it’s lawsuits from eBay.
When eBay bought the roughly 25% stake (turns out it was 28.4%), Newmark was quoted as saying: “[eBay and us] share the same moral compass, they’re good partners”. I thought it was hogwash: either Craig was naive or delusional, possibly both. eBay did not invest in Craigslist because they needed to share morality or determine which way was north. They did it to get into the listings business, and when Craig pushed back, eBay launched Kijiji.
But if you read eBay’s version of the facts here, you would think eBay was the victim and Craig/Jim the devils:
In 2004, after negotiating the transaction with craigslist’s board, eBay acquired a minority ownership interest in craigslist of 28.4 percent.
In January 2008, however, Newmark and Buckmaster adopted measures that, among other things, unfairly diluted eBay’s economic interest in craigslist by more than 10 percent. By taking these unilateral actions, eBay believes that Newmark and Buckmaster breached their fiduciary duties in violation of Delaware corporate law.
“The recent actions by the craigslist directors have disadvantaged eBay and its investment in craigslist,” said Mike Jacobson, eBay Senior Vice President and General Counsel. “Since negotiating our investment with craigslist’s board in 2004, we have acted openly and in good faith as a minority shareholder, so we were surprised by these recent unilateral actions. We are asking the Delaware court to rescind these recent actions in order to protect eBay’s stockholders and preserve our investment.”
The matter will now be resolved in court… maybe Craig can take some of those millions and offer to buy ot eBay, what’s the alternative? Raise PE or VC to do that… he’s idealistic, not crazy.
But jokes aside, in this bizarro world scenario:
eBay = VCs
Craigslist = entrepreneurs / company.
In the world as we know it, ’tis the VCs who try to reduce the holdings of entrepreneurs through term sheet fine print items and boardroom shenanigans, but in this case, the entrepreneurs are trying to pull a fast one (allegeldy) on the investors.
I think this is why some investors want control and why companies rarely invest as minority investors.
YHOO just came out with their Q1 report. To give them credit, Q1 was decent (see our assessment here) but not good enough to raise the bid, ultimately, and this makes me wonder why all of the huffing, puffing, and bluffing?
Ultimately, this recaps YHOO’s disastrous handling of this opportunity. They have taken a wonderful opportunity (a $45B exit) and turned it into a disaster.
Let me count the ways:
AS A SHAREHOLDER:
While MSFT offered YHOO $31/share initially, the actual value has fallen. Combined with the time value of money, YHOO will ultimately risk not getting anywhere as much as it could have obtained had they acted promptly.
In fact, I think this will cost investors $4-9 / share.
But while I held a low 6-digit holding in YHOO (and since sold 90%) I am appalled more as an observer than as a shareholder.
AS AN EXECUTIVE:
On Day 1 when MSFT launched its offer, YHOO should have gone to the table and discussed this deal.
I think they could have said that they wanted $40 / share at least… and walked away with $35-40 fairly easily. Had a deal been consummated quickly, the value of that would have been considerable to MSFT. But now, here we are 2 months into this stalemate and MSFT holds all of the chips.
AS A CEO MYSELF:
Jerry Yang is getting some bad advice. I wish I have advisers that have the courage to tell me when I am being wrong or fail to read the signs as they appear. Yang’s legacy of building the uber brand of Web 1.0 will probably be somewhat tarnished by his emotional and childish behavior in this deal. Jerry, when the world’s biggest and most valuable technology company (MSFT) comes to you and offers a 62% premium to bail your company out, you do not rush into the arms of world’s biggest Web company (Google) who is the main cause of 99% of your worries!
This is where investment bankers, lawyers and board members need to earn their fees and they have not, frankly.
AS A USER:
Why in God’s name is YHOO buggy? What superior engineering is MSFT talking about when I - a long time YHOO user can no longer use your products because none of them work?
AS A MARKETER:
If this was not all enough, YHOO now decided to increase minimum bids too. For one, no one I know uses YHOO Search Marketing… and this will kill off anyone else crazy enough to still use this crapbox.
What kind of shipwreck is this people? Best of all, to cap it all off… all of this bluffing for what?
Disaster I tell you. All right, back to work.
Note: Own some shares in YHOO.
Read our overview of the Q1 report here.
With the industry growing at over 20%, Yahoo! tried to put its best face forward, bullishly hawking a 9% year-over-year growth rate in revenues.
On the income statement:
- Revenues were $1,818 million for the first quarter of 2008, a 9 percent increase compared to $1,672 million for the same period of 2007.
- Revenues excluding traffic acquisition costs (”TAC”) were $1,352 million for the first quarter of 2008, a 14 percent increase compared to $1,183 million for the same period of 2007.
Translation: dollar-for-dollar, it cost a bit more for YHOO to generate those revenues… and this I suspect is due to the fact that it acquired Blue Lithium and Right Media, two big ad networks to pay out a good chunk of the revenue they collect.
- Gross profit for the first quarter of 2008 was $1,063 million, an 11 percent increase compared to $958 million for the same period of 2007.
- Operating income for the first quarter of 2008 was $121 million, a 28 percent decrease compared to $169 million for the same period of 2007.
Translation: As we’ve long said, this company is bloated and needs to reduce layers of management, since labor costs are usually the lion’s share of overhead… R&D costs are usually major sources of costs, too… and we all know that after wasting billions, YHOO is looking at getting close to Google with regards to outsourcing search, or merging its R&D with MSFT once MSFT acquires them.
United States segment revenues for the first quarter of 2008 were $1,307 million, a 19 percent increase compared to $1,101 million for the same period of 2007.
International segment revenues for the first quarter of 2008 were $510 million, an 11 percent decrease compared to $571 million for the same period of 2007.
Translation: This is not good. Many growth opportunities internationally, which combined with a weaker USD is just bad news. All in all, the fact that international decreased shows how weak YHOO is doing in Europe, for example… yet all of this is ironic because YHOO has been pushing its Asian properties as a reason to get more from MSFT. On the positive side, Google is already at 51%… so this suggests YHOO has upside in global operations. Will they execute? What do you think?
On Guidance:
Thankfully, YHOO upped guidance but not by all that much and frankly, YHOO would right about now sell its mother for a nickel if it means getting a few pennies more from MSFT, after all, there is NO way YHOO remains independent come Q3, let alone Q4 2008.
On the balance sheet:
Cash, cash equivalents, and investments in marketable debt securities were $2,848 million at March 31, 2008 as compared to $2,363 million at December 31, 2007, an increase of $485 million.
This remains too little for YHOO to compete effectively for M&A.
Bottom Line:
- I fail to see how this changes much: MSFT is offering more for YHOO than YHOO is able to command from the Street or from other buyers. In fact, one of the main “white knights” (News Corp.) is now aligned on MSFT’s side. We explained why here.
- Moreover, I was even expecting a 10% likelihood of them announcing a merger with AOL with Google taking over search and guaranteeing an obscene revenue deal. None of that…
- Initially I thought MSFT would pay $50B… which would have been roughly $34-35, but the way senior brass has mismanaged this entire debacle, I think MSFT is celebrating over at Redmond.
Here’s what will go down:
Step 1: One last attempt between now and Friday to do this cordially. MSFT will whisper that they won’t go higher than $33… that would be about $46.2B.
If they get rebuffed…
Step 2: then MSFT will go hostile and this will get drawn out into the dog days of summer with a $31 offer finally being accepted during a formal legal tender.
And really, that is if and only if YHOO stops acting so dishonorably and cease to waste shareholder’s time and value (ie. stop it with the deals with Google, or the excessive severance packages).
Note: I’ve sold the vast majority of my holdings because none of this is based on rationality anymore. It is all emotional and going to get uglier before it gets better. And… I think YHOO might have played with figures, to boot.
MySpace - owned by Rupert Murdoch’s News Corp. - wisely chooses NBC News (left leaning) over FOX and WSJ, sister companies in Mr. Murdoch’s empire.
This shows that while News Corp. will leverage cross-company synergies, they won’t spit in the face of their audience, either.
Translation: Rupert Murdoch is not crazy. Personally, what I would have liked to see would be for MySpace to partner with NBC (which they did here) but also feature content balancing NBC’s tone and views from FOX News. Hey, isn’t social media all about the conversation?
I’m just asking…
Anyway, lost in this is the fact that MSNBC bought NewsVine… where is that in the mix?
Everyone and their uncle is expecting YHOO to report a strong Q1, which let’s face it, is a surprise considering just how woeful Q4 2007 was and how tepid guidance for 2008 was. What could have possibly happened for YHOO to become so bullish on its forecast, that in a cooling economy?
Here’s what I think:
Once MSFT unleashed an unsolicited bid, YHOO talked to the usual suspects for an alternative, seeing that there were no takers, it decided to employ a scorched-earth, all cards on the table kind of strategy for Q1.
In other words, it said to itself “the writing is on the wall, how do we maximize share price?” How could they prop up Q1 revenues? Here’s what they did, I suspect:
1- On the high end of the advertiser spectrum: I think what they did is basically get advertisers who had committed to ad deals for Q1 and beyond to allocate budgets to Q1, to make up for the missing Q2 and beyond ad spend, I suspect YHOO probably gave makegoods and value-add placements.
For example, say AMEX agreed to spend $500,000 from February to May (or $125,000 over 4 months). Yahoo went back and asked AMEX if they could book all $500K in Q1, so February and March, and then gave AMEX $250,000 in make-good for March and April. This is not illegal or even unethical. It’s dangerous because it cuts into eCPM, but in the context of MSFT’s acquisition efforts - and having seen CEO Yang dole out expensive severance packages - I suspect this is nothing.
2- Then on the low-end of the advertiser spectrum: I also suspect YHOO dropped its minimum requirements for ad deals size or CPM rates to get more money in the door. Such tactics are great for short term revenue spikes, but they come at the expense of long term revenue strategy positioning.
For example: YHOO might usually ask for $20 cpm on main page or $1 cpm on long tail inventory, or minimum ad deals of $10,000… it is plausible that YHOO got everyone’s money no matter what… to boost revenue even though this meant chasing smaller peanuts that it would usually not consider to be worthwhile.
I could be wrong: but it’s clear that YHOO will report a strong quarter… I just don’t know what happened between January 29 (earnings call) and today to have merited this added bullishness, other than what I outline above.
Any thoughts?
Note: Long YHOO
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