Yahoo and Microsoft haven’t been able to agree on very much over the last few months so it now appears fairly likely the battle will head into the shareholder meeting on August 1st.
Microsoft hasn’t lost many of these matches and the smart money remains on them to “win” this battle and take over Yahoo. My take is that there is now enough ego investment on all sides that you can expect Microsoft to be pretty ruthless in their efforts to replace the board and overhaul the company. Of course with with management leaving Yahoo at a record pace anyway, Microsoft is likely to inherit more of a management skeleton than a burden, and they are probably fine with this.
How poison will Yahoo make the pill? As a shareholder I’m concerned about this but comforted that the current board and Jerry Yang have a huge financial stake in this outcome. To Bostock and Yang’s huge credit they has been playing this game with their own money, though I’d argue they have not been playing it very well or with anybody’s best interests in mind (including their own). My take is that Yahoo simply could not readjust their expectations from the dramatic success story they enjoyed early on and the belief they could see that kind of success again. This gave them a perception of the current value of Yahoo that was completely out of line with the market perception, which by definition is the real value of a company. The $33 sale price has come from the desparate realization by Yahoo that they are going to lose the battle and possibly be forced to sell well below this price, though I think it’ll be in Microsoft’s interest to keep the tensions to a minimum and keep their new “post Yahoo merger” shareholders marginally happy with an offer above $30.
That said, Ballmer is clearly smelling the blood in the water and could probably force an eventual sale of Yahoo in mid to high twenties by jerking the strings for a few more months to soften up Icahn and other major shareholders who are clearly looking for something above the $31 offer Yahoo rejected a short time ago. Without Microsoft Yahoo’s share price would be well under $20 and this is now clear to everybody.
So the boxing match moves into the final rounds. It’s pretty much a corporate death match between Jerry “the Yahoo” Yang and Steve “the Basher” Ballmer. Although my money is invested with Jerry right now, I’d be betting on Ballmer to win this fight.
TechCrunch is reporting that Microsoft has “excused” the proposed slate of new Yahoo board members telling them that they won’t be needed anymore. I don’t think this tells us much if anything about the status of a new deal which rumors suggest may come from the Yahoo board’s concern over losing…billions of dollars.
I think MS is just playing this very smart. These little measures are designed to get the current Yahoo board to rethink their folly. I think only Jerry was dead set against the merger and the rest of the board would have settled for 35 or even 34 per share. Why wouldn’t they? Yahoo has been languishing for years, and the chance of getting back to 34 *without Microsoft* is fairly slim in the coming lean advertising years, not to mention the fact that low morale, challenges at the company, and the declining prospects with Microsoft may take the stock even lower.
Yahoo should have sold at 33 and I think they will almost certainly sell at 35 due to pressure from Shareholders and (more importantly) heavily vested board members who are “losing”, collectively, several billion dollars by sticking to their guns in this.
Blodget has a good summary of Jerry Yang’s Yahoo note to the troops articulating the reasons for the rejection of Microsoft’s offer and the company’s future plans. He gives Yang an A- but I think this might be generous.
I’m wondering if Yahoo didn’t fail recently, rather years ago when many lines of separation were drawn between technologists and most of the company management. I assume there were official lines drawn, but I’m talking more in terms of culture here. My bullishness about Yahoo has rested on the assumption that the technologists would eventually have their day and as with Google would create the tools necessary to keep Yahoo competitive and interface with the broader developer community as Google has done so effectively to bring more awareness and use of Yahoo tools, effectively widening their footprint over the internet landscape.
I no longer thing there is enough technological empowerment at Yahoo to make this likely anytime soon. It will take a LOT more than peppy emails and a combative stance here. Recent defections from Yahoo suggest that even internally Yahoos are more bullish on Google than their own company.
So, if we assume Yahoo’s got to do something really big is Microsoft or News Corp the best fit. From Yahoo’s perspective clearly they’d love it if News Corp was willing to pony up as much as MS, and frankly this seems like a more likely winning combination than MS and Yahoo which would have a lot of initial, and perhaps long term, contentiousness. Fox Interactive is run brilliantly, and applying these management principles to Yahoo could do a world of good to the bottom line of the combined company. As a Yahoo shareholder I’m rooting for that option though I’d predict MS will win this battle because of the difficulties News Corp will have showing how valuing Yahoo at 50 billion+ is justified given how difficult it may be to make a lot more money from the combined company in anything short of many years.
I’m feeling kind of smart today after feeling stupid *yesterday*. I had doubled my Yahoo stake before the earnings call, wrongly thinking that a good report was in store. However just fair earnings and poor guidance knocked the stock back a few dollars the next day. But it’s surging today as Microsoft has offered 44.6 billion for Yahoo, effectively making it worth a lot more than yesterday.
Perhaps the price hit after earnings drove Yahoo to some sort of strike point for Microsoft. At CES I think I may have been right to suggest there were high level meetings between Gates and Yang regarding a Microsoft Yahoo Merger , clearly MS must have been thinking about this for some time. Rumors have been swirling for over a year.
As a Yahoo enthusiast and shareholder it’s been hard to watch the company struggle so hard over the past few years only to lose ground to Google, especially because Yahoo’s social networking efforts and web 2.0 initiatives have in most ways been superior to Google’s. Flickr is the best example of a superb Yahoo application that is more used than Google’s Picasa (which is also excellent but was late to the scene so most early adopters are sticking with Flickr, which is somewhat better anyway in my view).
Henry Blodget at Silicon Valley Insider is reporting that Yahoo will proceed soon with the drastic layoff scenario – rumored to be some 1500-2500 people.
Human issues aside, this will likely be very good for the stock price and company’s future prospects. Google learned early on that the key to profitability was scaling up systems without comparable scaling up of staff. Google thus leveraged the incredible efficiency of computers to generate more profits. Yahoo, on the other hand and especially with Terry Semel in charge, sees themselves as more of a media and content producer with all the labor intensiveness and lack of internet efficiency that approach entails. Google was right, Yahoo was wrong. Even Google’s own Youtube, a masterpiece of creating cheap content without staff, is struggling to monetize all the content and traffic.
I’m oversimplifying the relationship of content production to profit here, but in general terms I continue to believe that the expression “content is king” was *never* true on the internet, and that in many ways sticking to this mantra cost Yahoo a big part of the ballgame. Yahoo actually used Google search as Yahoo’s search tool for many years, and could certainly have aquired Google in the early days for millions of dollars rather than becoming eclipsed by Google which now has a market capitalization of about five times Yahoo. Why didn’t they do it? Google was “search”, not “content”, and Yahoo foolishly believed content was king.
Content is a pawn in the big online chess game, and don’t forget it.
One of the things I left out of my earlier David Filo interview post were the details of Jerry Yang’s talk, which I’d have to say was lackluster given the amount of attention the markets are paying to Yahoo leadership right now, and given the slick pizzaz of yesterday’s Gates keynote. (C’mon Jerry – no Guitar Hero action?). Yahoo spent a lot of time talking about and “introducing” Yahoo Go” Version 3, a product I’m not familiar with but Yahoo treated as if it was a household word. It looked a lot like the MS mobile phone innovations and offered excellent info+browser+mapping+data integration for phones. Also announced was an expansion of mobile and widget platforms to make them more “open” and therefore more appealing to developers, though I’m not clear how significant this will be. Yahoo, like Microsoft yesterday, noted that they are looking at *billions* of mobile users and that although PCs are still important to them it’s clear that mobile is the bright and shining star where innovation will be happening.
Disclaimer: I’ve got some Yahoo Stock, but none of it was helped by this post.