New York Times: After Deal Dies, Yahoo Weighs Its Next Move
By MIGUEL HELFT
New York Times
Published: May 5, 2008
SAN FRANCISCO — How low will Yahoo’s stock go on Monday? And how long will it stay there?
These questions are high in the minds of Yahoo shareholders, and probably its management, as the company considers its options after Microsoft’s decision to withdraw its offer to buy Yahoo for $33 a share, or approximately $47.5 billion.
Much will depend on Yahoo’s next moves, which could include a partnership with its chief competitor, Google.
People close to Yahoo said that the chief executive, Jerry Yang, and his team, who told Microsoft they would not sell for less than $37 a share, greeted Microsoft’s decision as a victory. High-fives were exchanged Saturday afternoon when they learned Microsoft was backing down.
Yet some Yahoo shareholders, large and small, have indicated that they favored a deal at around $34 to $35 a share. Even those who were holding out for a higher price said a merger with Microsoft made strategic sense.
“I don’t believe that Jerry Yang as a founder, as someone who is emotionally attached to the company, was really looking out for my interest as a shareholder,” said Darren Chervitz, co-manager of the Jacob Internet Fund, which owns about 150,000 shares of Yahoo. “I don’t think anything Yahoo puts out there is going to be comparable with what Microsoft was offering.”
The entire board backed Mr. Yang’s desire to reject Microsoft’s offer, said a person involved in the negotiations who was not authorized to speak publicly about the matter. But unhappiness with Mr. Yang could spread through the company’s ranks.
“If the stock drops as far as I think it will, a lot of employees are going to be angry and many key employees could leave,” said a Yahoo executive, who asked to remain anonymous to avoid upsetting his superiors.
Analysts say Yahoo’s shares are likely to drop below $25 and perhaps to as low as $20. Yahoo shares were closed at $19.18 on January 31 before Microsoft made its initial offer. They had risen to $28.67 on Friday.
Yahoo defended its decision, saying it had always thought Microsoft’s offer undervalued the company. Officially, the company has shed little light on what it might do next. “We remain focused on maximizing shareholder value and pursuing strategic opportunities that position Yahoo for success and leadership in its markets,” Roy Bostock, Yahoo’s chairman, said in a statement issued late Saturday.
But people close to the company suggested that Yahoo’s most likely lifeline could come from an unlikely source: Google.
The two companies recently conducted a two-week test in which Google delivered ads on a small portion of Yahoo searches. The test, which both companies described as successful, was intended to show how much more Yahoo could earn by outsourcing some of its search ads to Google, whose technology and large base of advertisers allow it to extract more revenue on average for every search.
Now Google and Yahoo will have to decide whether to move from test to broader partnership. Talks around a deal were active Friday, even as Yahoo and Microsoft were engaged in a last-ditch effort to come to an agreement, said a person familiar with the discussions.
For Yahoo, the idea of letting Google run some of its search ads is not new. Some shareholders and even some Yahoo executives have long favored it. By the company’s own reckoning, Google earns about 60 percent to 70 percent more on average for every search than Yahoo.
But before Microsoft made its offer, Mr. Yang and his team had repeatedly rejected the idea, saying search advertising was an essential part of the company’s long-term strategy. Instead, the company spent millions in improving its own search advertising system, called Panama, telling investors it was the right choice.
In a letter sent Saturday to Mr. Yang, Steven A. Ballmer, Microsoft’s chief executive, used precisely those arguments to emphasize why a search advertising partnership with Google was a bad idea. He also noted that it was one reason Microsoft decided to walk away from its offer, rather than initiate a proxy fight.
A partnership with Google “would fundamentally undermine Yahoo’s own strategy and long-term viability by encouraging advertisers to use Google as opposed to your Panama paid search system,” Mr. Ballmer said. “This would also fragment your search advertising and display advertising strategies and the ecosystem surrounding them.”
Yahoo and Google, however, are not talking about outsourcing all of Yahoo’s search ads to Google. Instead, they are considering a more limited partnership, under which Google would deliver ads only on particular searches for which the revenue difference is significant, according to people familiar with the discussions.
Analysts say such an arrangement could have multiple benefits. It would allow Yahoo to retain Panama and even use the extra revenue it receives from Google to invest in its own ad system.
A limited partnership could help get around the antitrust scrutiny that a broader deal would most certainly face from regulators. The Justice Department has already begun asking questions about the companies’ relationships.
Some in Silicon Valley say a deal with Google made sense before and makes sense now. “If Yahoo were to put as much attention into its product as it put in catching Google in search monetization, it would be doing fine,” said Roger McNamee, a veteran technology investor and the co-founder of Elevation Partners, a private equity firm.
Many analysts say that a partnership with Google is the most significant thing Yahoo could do to bolster its value to shareholders.
Until this weekend, Yahoo was still in active discussions about a possible merger with Time Warner’s AOL unit, said people with knowledge of the talks. Under the deal being considered, Time Warner would exchange AOL for a 20 percent stake in Yahoo, these people said.
But some analysts warn that a merger with AOL may not be a panacea for Yahoo. Advertising on AOL’s main portal has declined recently, and the company has been through a string of acquisitions of online advertising companies that have yet to be successfully integrated into AOL.
“I think you’d have potentially equal or greater integration challenges in a Yahoo-AOL combination than in a Yahoo-Microsoft combination,” Christopher Vollmer, who leads the media practice at consultancy Booz Allen Hamilton, said in a recent interview.
Yahoo, or its executives, may also initiate a stock buyback, to demonstrate to shareholders that they have faith in the company. Yahoo had $2.3 billion in cash and cash equivalents as of March 31.
“It stands to reason that if Yahoo seems so convinced that the stock is worth at a minimum $37, insiders and the company itself would probably have to put their money where they mouth is,” said Scott Kessler, an equity analyst with Standard & Poor’s.
Regardless, shareholder lawsuits are likely to follow. Eric Jackson, who has organized an informal group of individual shareholders collectively holding about 2 million shares of Yahoo, said that he planned a campaign urging Yahoo shareholders to withhold their votes from all Yahoo directors at the company’s annual meeting, which is expected to be announced soon.
“I always had a concern that the board would bluff its way to this kind of an outcome,” said Mr. Jackson said. “But I didn’t think it would come to this. I’m very upset.”
