Tuesday, February 05, 2008

Yahoo Won't End with an Exclamation Point, but a Whimper

The Microsoft offer for Yahoo! last Friday was a brilliantly timed and priced bid. It left Yahoo!'s board and management completely flat-footed to do anything about it.

On price, at $31, Yahoo! shareholders like me - frustrated with the lack of action on the part of the company since they appointed a new CEO last June - were relieved that they were receiving a 62% premium to Thursday's closing price. I have heard Yahoo! employees and ex-employees express disgust at the offer as too low; shareholders, however, tend to be more realistic and seem to convey more of an "I'm ready to get off this ride now" attitude about the deal. Gloom and doom had recently taken root among us after the Q4 earnings call failed to inspire. It seemed more likely that our shares were going to see $13 before they saw $31 again. Yet, Microsoft could be proud that their offer was still a few bucks less than Yahoo!'s November high (spurred on by hopes of the Alibaba.com IPO, of which Yahoo! owned a sizable stake).

In terms of timing, who else is going to trump Microsoft after the Dow lost more today than in the previous 2 years? News Corp, Comcast, and NBC have all gone out of their way to back away from the prospect. AT&T and Time Warner? This isn't 1999 or 2000. Does Randall Stephenson or Jeff Bewkes want to be remembered as the Gerry Levin of his day -- especially this early in his tenure? Their reputations would never recover.

And anyone who seriously believes a hedge fund or private equity firm is going to take a run at a $44B+ deal in this environment is completely out of touch.

So, good luck to the Yahoo! board in finding a white knight. The only argument left for Yahoo! to make to its shareholders is that, rather than $31 in cash and stock from Microsoft, shareholders' value would be "maximized" if they opted for a $17 - 19 Yahoo! with a dogged determination (and maybe an outsourced search deal with Google or a promised spin-out of some or all of its foreign assets) to "go-it-alone" and raise that price higher than $31 in short order.

That argument is a non-starter.

I believe that Jerry Yang and David Filo want to fight. These guys want what's best for Yahoo!, its employees, users, and shareholders. They're not in this for the money - this is their baby. I believe they (with the board's acquiescence) have been trying to lay the foundations over the past 8 months to turn this company around. That approach would have worked in a private company - and it probably would have worked in most low-profile public companies. But this is not a low-profile company, this is Yahoo!: the Britney Spears of the Business Media, the company we cannot help but be fascinated by. Given that intense focus, quiet introspection and doing the right thing for the long-term behind closed doors didn't inspire confidence and the stock price suffered - putting this company in play.

Yahoo! is now backed against the wall. You could parachute Jack Welch in to run this company or lead this board now and it wouldn't matter. It didn't have to be this way. What if they'd bought Google or Facebook way back when...?

When I launched my activist campaign last January promoting major changes within the company, I worried that Yahoo!'s board and management weren't moving quickly enough to address the challenges facing it. Although there have been some attempts to correct these, they've not nearly been enough.

Being an Internet pioneer isn't a birthright to a place at the "leaders of the Web" table for life. Microsoft stopped the music last Friday morning, leaving Yahoo! without a chair to sit on.

I'll take the money and stock from Microsoft when the deal closes or a few bucks more (have you ever met a shareholder who didn't want a few more bucks on an offer?), but I won't be happy about it. Yahoo! shareholders deserved a better fate than this. I won't feel an exclamation point when I exchange my shares.

Winners of the Deal

- Microsoft: More people criticize the "integration risk" of this than the price. Sure big company integrations are difficult, but they're eminently doable. Microsoft has done a good job of them recently, although none as big as Yahoo! Oracle/PeopleSoft? HP/Compaq? Keep folks in the Valley, give them more resources, don't be heavy-handed, get rid of the deadwood upper and middle Yahoo! management and the best Yahoo!s will be happier.

- Steve Ballmer: Bill has left the company. Steve's going to do what he can do to win. He's not going to be bound by Microsoft convention. Sure, people can gripe that "two also-rans never combined to overtake a market leader," but can you think of a better single strategic move he could have made to close the gap with Google? You don't think $400 Google knows this?

- Yahoo! engineers: time to re-up your employment contracts.

- Yahoo! shareholders: thank you, Microsoft, for taking away our recent suffering.

- The Business Media: I feel bad for these poor reporters who have to write 4 stories a day about this deal. Readers' appetite for this stuff is insatiable, I guess. It must be good for advertising.

Losers of the Deal

- Yahoo! Management and the Board: Being caught flat-footed like this doesn't look great.

- Yahoo!s who got promoted and shouldn't have and stayed because they didn't have anything to go to: They're a minority but there were too many of them still hanging out. Microsoft would be happy if Google took them.

- Google: Look Google is still Google - a great company which will still be dominant. However, if you had to ask them whether they preferred to lead two weak sisters bumbling around or a 30% MSFT, the answer is obvious.

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