Tech Crunch points to a piece in the NYT on the loss of value of financial companies between October 9, 2007 and September 12, 2008, or roughly 11 months. Reading it, you can’t help but shake your head:
Citigroup: $236.7 billion to $97.8 billion.
Bank of America: $236.5 billion to $150.2 billion.
AIG: $179.8 billion to $32.3 billion
Goldman Sachs: $97.7 billion to $61.3 billion
American Express: $74.8 billion to $45 billion.
Morgan Stanley: $73.1 billion to $41.1 billion.
Fannie Mae: $64.8 billion to $700 million.
Merrill Lynch: $63.9 billion to $24.2 billion
Freddie Mac: $41.5 billion to $300 million.
Lehman Brothers: $34.4 billion to $2.5 billion.
Washington Mutual: $31.1 billion to $2.9 billion
In percentage terms, it is brutal:
Now the crazy part is that the broader stock market has not really woken up to this, and that spells bad news for the stock market. Bear in mind, much like the auto industry’s indirect impact on the economy is exponentially larger than its direct impact, the financial sector is pivotal to the economy. I’d say it is the industry with the greatest multiplier effect, and this effect is much sharper in downturns than upticks in growth. I remain convinced that some markets (be it sectors or geographies) will be less impacted, however, the fact that it is financial firms that are cratering, due to exposure to mortgages, is alarming. It’s one thing if financials crash due to risk mismanagement, but when it’s over mortgage risk mismanagement, expect chaos of gargantuan proportions.
Recall that in 2000, the Nasdaq imploded and took down the economy with it, this time around, the mortgage market crashed, and since these are not priced in real times, the shakeout is much less instantaneous, transparent, and seamless. I don’t think we’re feeling the full effects just yet. Don’t forget, these banks work with companies by lending and safeguarding their money, as such, layoffs as HP, eBay etc. are just the tip of the iceberg.
Nouriel Roubini, an economic guru I came across on Paul Kedrosky’s blog, has been apparently right throughout this tornado of crap and is pretty adamant that both Goldman Sachs and Morgan Stanley are next. Having studied finance, I must say, once he lays down his rationale as to why their business models are wrong, you tend to understand that indeed, they are doomed. This is why, to quote William Larkin, fixed income manager at Cabot Money Management in Salem, Massachusetts, “Goldman Sachs and Morgan Stanley are lining up dancing partners. They don’t want to be … this week’s victim.”
Sad, but true.
YHOO blew the deal, sure, and you have to wonder what that says for its bankers?
Allen & Co. is trying to raise money for Linkedin at a whopping $1B valuation. It’s worth noting that Allen & Co. is encroaching more and more on West Coast startups, it raised $50M for Ning and Slide at monster $500M valuations.
Interestingly, Allen & Co. was not involved in the YHOO/MSFT debacle… which begs the question: what impact, if any, will advisors of that deal have?
Microsoft was represented by Morgan Stanley and Blackstone, while Lehman Bros. and Goldman represented Yahoo! Goldman can do no wrong in proprietary trading, but what about its M&A advisory unit. Say what you want about the gold standard in investment banking, but on YHOO’s representation, you can’t help but think that Goldman takes a hit, as does Lehman Bros. Maybe they could not manage YHOO nor Yang, but as someone who has closed a few deals as an advisor or executive on a management team, I can tell you that managing personalities is a major variable.
MSFT was repped by Morgan Stanley, what I find odd, so odd, is that Yahoo! Chairman Roy Bostock sits on the board of Morgan Stanley, too. I am not suggesting any impropriety but that seems too close for comfort.
Again, why on Allen & Co.? They have become the leading investment bank in media, yet no one called on their service.
You will have to pardon Allen, they were busy cashing the checks off the Slide, Ning and soon LinkedIn deals.
Now that being said, let me check my bank account before Goldman and Lehman pull some strings and cut off the water. I’m kidding, I think.
You have to wonder: is Jerry Yang a hero or a goat?
Forget what you think of Jerry Yang as one-half of Yahoo!’s founding team, forget what you think of Yang as the Chief Yahoo! who saw Yahoo!’s meteoric rise and devastating fall from grace.
Forget even Yang in the over-hyped first 100 days since former Chairman and CEO Terry Semel left the company in 2007 after Eric Jackson’s crusade.
Ask yourself, however: what about Yang in the past 20 or so days since MSFT launched its unsolicited $44.6B deal.
What do the stakeholders think of Yang?
- Employees
- Users
- Clients (advertisers)
- Partners (that include hundreds of newspapers, AT&T, etc.)
- Shareholders
- MSFT (inevitably the company’s parent)
are just some of the stakeholders who will be impacted in the future. Many have been impacted already.
There have been a handful of shareholder lawsuits already. We’ve also seen an exodus of staff; the same people who MSFT Chairman Bill Gates supposedly covets.
I think that Yang has - until the MSFT bid - done an admirable job; the way he’s acted since, however, has been disgraceful. While I do respect a captain wanting to be the last to get off a boat, I don’t care much for people who sabotage a boat, either.
What Yahoo! seems to be doing is bite its nose to spite its face: the recent $1-3B severance package he so generously and recklessly doled out was the last straw for me, it was also borderline criminal, akin to someone raiding the corporate coffers knowing full well the impact of the deed.
Yang owns less than 10% of the company and unlike his peers over at Google, he does not actually own any special voting class shares. He is also not the Chairman of the Board. At what point is it really Yang’s decision when his actions adversely impact millions of others?
The last executives and founders who treated a publicly traded company like their own piggy banks ended up doing time, so as a friendly warning, someone in Yang’s camp of groupies should give him some good advice.
The problem is very few people in the Valley or in the mainstream media elsewhere dare to say any of this vocally. Everyone writes gloriously about Yang 1994-2007 but they seem to forget that Yang 2008 has been a disaster. I lost any and all confidence during the Q4 2007 earnings call on January 29th where I signed off: lawyers are drafting papers for a takeover bid; I wasn’t exactly wrong.
Silicon Valley might be an echo chamber, but it does not operate in a vacuum, the lawsuits you have seen thus far are nothing compared to what will hit Yahoo! and Yang if Yang continues this charade.
The struggling Internet firm has reportedly explored alliances with Google, Time Warner-owned America On Line, and social networking website MySpace owned by News Corp.; each potential deal stranger than the other with the resulting outcome murkier for shareholders.
What I’d like to do as a Yahoo! shareholder and user is see Yang come to the realization that the company he founded has run out of options the day MSFT checkmated it with a $31/share offer; he can take some time to come to that realization, but sooner or later, the energy he is spending on dead ends and potentially litigious pursuits he should be devoting on how to maximize the final sales price MSFT is willing to pay, how best to mitigate any risks and integrate the companies.
At this rate, however, it won’t be too late before Yang is pulled from the mound to make room for someone who understands the stakes in the game.
From the time MSFT launched an unsolicited takeover bid for Yahoo! and earlier this week, we covered every angle of the story possible, to the point that one of our readers asked, WTF?
We decided to tone it down a bit, but it’s been a few days since we talked about the deal at all, so it’s high time we dust off the dossier and look at what’s happening. The storyline is mezmerizing, a real soap opera.
1. Yahoo! Board: Divide and Conquer
Roy Bostock serves on the boards of directors of Morgan Stanley (who is representing MSFT, by the way), Northwest Airlines and Yahoo! He was the Chairman of Yahoo! for all of one day when MSFT launched a somewhat-hostile bid, helping up the price of Yahoo! stock from $18 to $29. If that does not spell out “effective Chairman” I am not sure what does.
On a more serious note, by virtue of not being your typical wine-growing, hippie-loving Silicon Valley type, Bostock understands that a Board’s obligation is to represent shareholders and a Chairman in particular serves as the liaison between management and investors.
It is the Board’s fiduciary duty to do what is best for shareholders, and as such, it’s not surprising to see Bostock lining up on the side arguing to accept MSFT’s bid, albeit he will probably try to up the bid to the best of his abilities. Bear in mind, Morgan Stanley represents Microsoft in this matter. Does that matter? You better believe it, he’ll be able to relay the message that a higher bid will grease the wheels enough to make accepting MSFT’s offer a fait accompli. More importantly, Morgan Stanley - along with Lehman Bros., Goldman Sachs, Blackstone and Moelis & Company - stands to make major fees if the deal goes through. If Morgan Stanley were repping Yahoo!, I’d still make this case (after all, bankers are not volunteers), but the fact that Morgan Stanley is repping MSFT and Mr. Bostock sits on the board of both Morgan Stanley and YHOO should not be taken lightly, especially after all banks have been hit heavily with losses in their sub-prime business. For the record, in no way am I suggesting impropriety or anything, but if anyone knows about the importance of heavy hitters on one’s board to pull strings, it should be Valley citizens. As a result, Bostock is torn and faces conflicts of interest, but to quote Silicon Valley dean and Kleiner Perkins VC John Doerr, “no conflict, no interest”.
For YHOO CEO Jerry Yang, an architect of the Web’s first iconic brand, the lesson is simple: if you want to run a company emotionally then:
a) don’t take your baby public
b) choose your allies (ie. board members) carefully
c) set up dual-class shares and keep voting control, as the Google guys did.
2) Cutting the Fat at Yahoo!
Some time ago (before MSFT’s bid) I asked if Jerry Yang was secretly trying to reduce some of the fat off Yahoo! to position it for a sale. Clearly, seeing his aversion and allergic reaction to MSFT’s bid, I now doubt that is the case. But I will say that Microsoft is welcoming seeing both layoffs and resignations at Yahoo! It will make integrating Yahoo! much simpler, from a management, accounting and strategic perspective.
In fact, I think the market is speaking loud and clear: they are welcoming layoffs and resignations at Yahoo! in what can only be described as a vote of no-confidence at Yahoo! and a suggestion that Microsoft management can do a better job managing Yahoo!’s assets. Given MSFT’s torrid growth at its core operations, it’s not an incorrect conclusion, frankly.
3) You Always Have Other Options?
Let’s see. Last week, the AOL/Yahoo! merger came up. We shot it down as nonsense. Earlier this week, the News Corp. hookup rumor crept up again. More nonsense. Why would Rupert Murdoch do that? He’s getting $900M in guaranteed revenue from Google… why would he totally give up control of Fox Interactive Media (which he built with $2B) for a chunk of Yahoo! that he cannot really control day-in, day-out, nor consolidate its financials, for that matter… so not surprisingly, the desperate Yahoo! camp is now once again touting the AOL merger talk, which we are convinced won’t happen.
4) Behind the Scenes
I expect members of Yahoo!’s Board to start having discussions with MSFT’s bankers and lawyers, if they’ve not already started doing so.
You might have noticed that when Yahoo! first rejected MSFT’s offer, the press release mentioned that the Board members had their own external counsel. Usually companies have Directors and Officers insurance that covers them against many things including shareholder lawsuits. For them to publicly mention that they have their own counsel suggests far more dissent than you would think. My gut says that a few of the Board members are considering resigning and the fact that they went public - albeit somewhat anonymously - with accusations of Yang’s emotional reaction to the offer was a warning to Yang et al.
As well, you might have noticed that missing in all of this is President Sue Decker. I am not sure quite what to make of the following, but Microsoft has just hired Decker’s former colleague, Blackstone’s Jill Greenthal. As I mentioned last week, the behind-the-scenes of the MSFT/YHOO showdown will create a far more interesting tale than what you see in black and white in press releases and what not.
We were one of the first ones to outline the cross-ownership between the two companies, but unlike most, our conclusion is that these shareholders want a quick resolution to what is not starting to look like the inevitable. As a result, if you connect the dots you start to see this deal coming to a “friendly” agreement at $50B.
5) When the Silicon Valley Dream Died
The bigger storyline here, I think, is the following. Reading Michael Arrington’s observations on Seattle vs. Silicon Valley, he stated: “If you want to change the world and are willing to do absolutely anything to achieve your dreams, there is no better place to be than [Silicon Valley].” He is probaly right… but when MSFT ends up gobbling YHOO, a lot of the facade and innocence (if you can call it that) about the Valley will go down the drain.
This is by no means a knock at the Valley. But the premise of starting a company and taking it public evaporated in March 2000 when the Nasdaq got decimated. But for many in the Valley who dislike and distrust MSFT, seeing all-around nice guy Jerry Yang have to lose control of his purple baby to Redmond will probably make a lot of, or least some, realize that going for the jugular isn’t all it’s hyped to be if it means seeing it go the way of Yahoo!
Note: Long YHOO.
Assuming the Microsoft takeover of Yahoo! consummates, the investment bankers will be making a fortune:
The four advisers, Goldman Sachs , Lehman Bros., Morgan Stanley and Blackstone stand to make as much as $1.3 billion between them, analysts and experts said.
They said advisory fees range anywhere from the customary 2% of the eventual buyout price to custom-made payouts that rarely top more than 3%.
Under traditional terms, Yahoo’s bankers could split around $446 million, while Microsoft’s team might divvy up more than $890 million or 0.5% of the finished deal’s value. A review of publicly disclosed fees from 600 similar deals tracked by research firm Dealogic indicates a similar trend in comparable acquisitions.
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