Microsoft’s Corporate Development Strategy Changing Daily
Microsoft Chairman Bill Gates told the press in Tokyo yesterday that the company “isn’t pursuing other deals following the withdrawal of its $47.5 billion takeover bid for Yahoo.” Their experience dealing with Yahoo, apparently, has put them off acquisitions altogether.
But wait. Just Monday Gates said “I wouldn’t rule out some partnerships but we don’t have anything imminent there” following a meeting and dinner with South Korean President Lee Myung-bak. In corporate-speak, that’s a pretty strong statement that Microsoft wants to buy some companies.
Did Microsoft change corporate development strategies from one day to the next? It appears they did. On Monday he says he wouldn’t rule out partnerships. Tuesday, no partnerships and a go it alone strategy.
What’s the real strategy? I can’t help but wonder if their key goal is to convince the market that they really don’t want Yahoo in order to drive their stock price down as far as possible. It’s clear that the markets still anticipate a deal with Microsoft, or possibly Google. It is currently trading at just under $26; analysts think its share price should be closer to $22.
If Gates is out telling the world, as he did on Monday, that they need to acquire other companies to fix their Internet strategy, it doesn’t take very long to figure out that there isn’t another Yahoo out there on the market. Microsoft has a long term problem on its hands, and Yahoo may be the only remedy. So when Gates says Microsoft isn’t pursuing deals, what I tranlate that to is “We really, really want to buy Yahoo.”
Crunch Network: CrunchGear drool over the sexiest new gadgets and hardware.
Arrington and Ross Sorkin Talk About Yahoo On Charlie Rose
Last night, Andrew Ross Sorkin of the New York Times and our own Michael Arrington appeared on the Charlie Rose Show to talk about —what else?—Yahoo, Microsoft and the non-deal that everybody can’t stop talking about. The segment is embedded above.
Michael notes in the piece that Microsoft has a long-term problem in that it has to figure out its Internet strategy. And even putting together AOL, MySpace, and Facebook does not bring what Yahoo does to the table: a real player in search. He also suggests that Microsoft might come back with another lower bid. And that Yahoo should have accepted the bid back in February.
He also notes that Yahoo’s banker, Goldman Sachs, was rumored to have gotten an independence fee, meaning it will be paid extra if Yahoo stays free. If true, it could have been working at cross-purposes. As he points out, on Saturday, the most important day of the deal, the company sends Jerry Yang and David Filo. He asks: “Why wasn’t [chairman] Roy Bostock there to make the deal?” Good question. Here’s another one that Mike poses: “Is Jerry Yang still going to be the CEO of Yahoo?”
(Check out Michael’s first appearance on the show from March).
Crunch Network: CrunchBoard because it’s time for you to find a new Job2.0
Is Yang Still In Control At Yahoo?
Here’s the latest Yahoo rumor that we’re chasing: The Yahoo board of directors met earlier today and authorized chairman Roy Bostock, not CEO Jerry Yang, to call Ballmer about re-starting negotiations. In fact, this rumor may have been behind the small rally in Yahoo’s stock today, which closed up 5.5 percent to $25.72 (still down from where it closed on Friday at $28.67). If this is true, it makes you wonder who is really in charge at Yahoo.
Yang has been getting a lot of grief from angry shareholders for not taking Microsoft’s $33 a share offer, and instead holding out for $37 or $38. Now his story keeps changing on when he learned about the $33 bid. But when Ballmer balked and called off the deal, that may have been when Yang’s grip on power began to weaken. What happened next was curious. In Yahoo’s official press release on May 3 responding to Microsoft’s termination of negotiations, it was Bostock who issued the primary statement from Yahoo, not Yang.
As we understand the chronology of events from last week, Ballmer made his $33 offer on Wednesday, April 30. But fearing that the offer may not have been made clear to Yahoo’s board, says a source close to the negotiations, Microsoft’s general counsel Brad Smith called Ron Olsen, the lawyer for Yahoo’s independent directors, on Friday to reiterate the $33 bid. Then on Saturday, not hearing back anything new, Ballmer reviewed his $33 bid versus the $37 to $38 that Yang had been grasping for. And then he walked.
Now the Yahoo board may be rethinking that stance, and putting Bostock in charge of negotiations. The timetable for any new negotiations is about ten days, since Yahoo announced yesterday that its annual shareholder meeting will take place on July 3. That gives Microsoft (and anyone else) until May 15 to nominate an alternate slate of directors, should it choose to revisit that option.
Whether or not Yahoo’s board actually met today and authorized Bostock to restart negotiations is entirely speculation at this point, say our sources. But here’s one more interesting tidbit. Today, Yahoo board member Eric Hippeau was supposed to speak on a panel with me and others at the In-Call Media Summit in New York (where we both live). He didn’t show up. Another venture capitalist from Softbank took his place. When I asked around what happened to Hippeau, I was told by someone else at the conference who would have known that he is in Sunnyvale. So maybe the board did meet today after all.
Crunch Network: CrunchBoard because it’s time for you to find a new Job2.0
Could AOL Be Next on Microsoft’s List?
With Microsoft walking away from the Yahoo deal, there’s been a lot of talk about what it’s next best option would be. Going after AOL is an obvious choice. It has the ad inventory (aka pageviews) Microsoft needs, has its own collection of growing online advertising businesses, and has a very willing seller in parent Time Warner. The Times of London is reporting that Microsoft and AOL are in “preliminary talks” about an acquisition. And AOL isn’t exactly hitting on all cylinders right now, so it could be a much cheaper, cleaner purchase.
http://business.timesonline.co.uk/tol/business/industry_sectors/technology/article3876643.ece
Of course, Microsoft is still talking to everybody at this point, except maybe Yahoo. Whether it truly intends to set its sights on AOL is unclear because it needs to talk to AOL at the very least as a strategic ploy to try to thwart any possible deal between Yahoo and AOL (which has always been a possibility in the background). But at least Wall Street doesn’t seem to think that a deal is imminent. Yahoo’s shares are up 4 percent from yesterday to $25 a share right now, while Time Warner’s shares are pretty much flat at $16 after rising about 6 percent last week. Maybe Yahoo’s talks with Google are going better than Microsoft’s talks with AOL.
(Disclosure: As a former employee of Time Warner, I own some shares in the company)
Crunch Network: MobileCrunch Mobile Gadgets and Applications, Delivered Daily.
Yahoo’s Tumbling House Of Cards
“I’m extremely disappointed in Jerry Yang. I think he overplayed a weak hand. And I’m even more disappointed in the independent directors who were not responsive to the needs of independent shareholders.”
- Gordon Crawford of Capital Research, which owns 6% of Yahoo’s shares
The lawsuits are rolling in, and Yahoo’s biggest shareholders (see quote above) aren’t being shy about what they think of Jerry Yang and the Yahoo board of directors.
My guess is that Microsoft still very much wants Yahoo, they’re just trying really, really hard to make it look like they don’t. Now is their time to strike (again) as Yahoo’s shareholders are driven to make public comments like the one above out of sheer frustration.
If I were Microsoft, I’d place a new bid for Yahoo at $33 per share, and let the offer stand for three days. Yahoo’s shareholders are speaking quite publicly now that they think $33 is just fine, thank you. Yahoo’s board would have very little standing at this point to oppose it, with their stockholders making their position so clear.
Crunch Network: CrunchGear drool over the sexiest new gadgets and hardware.
Hotmail Users Can Now Improve the World Effortlessly
Microsoft’s i’m Initiative, which launched in March 2007, has expanded to include Hotmail. The program donates a portion of the ad revenue generated through Hotmail and Messenger to any of ten worthwhile causes.
I like the basic premise behind the i’m initiative - it’s an opt-in and fairly unintrusive service that just puts an extra i’m-specific advertisement at the end of your emails, or an i’m icon next to your buddy list name. The more email and messages users send, the more money Microsoft donates to the charities of those users’ choices.
Microsoft so far attributes more than 20 million new downloads of Messenger to the campaign, in addition to increased usage of all Windows Live offerings such as Live Search and Hotmail. Since March 2007, the campaign has donated about $1.4 million to charity.
Crunch Network: MobileCrunch Mobile Gadgets and Applications, Delivered Daily.
Citi’s Mahaney Says Microsoft/Yahoo Merger Still 15% Likely
Citigroup Internet Analyst Mark Mahaney (our interview from last week is here) updated his Yahoo guidance today based on the Microsoft bid withdrawal over the weekend.
He sees Yahoo’s stock going to $22 if they continue with “business as usual” and don’t find a partner. This is 45% likely, he says. He gives a 40% chance that Yahoo pursues a major strategic alternative such as a Google outsourcing, partnership with AOL or MySpace, stock buyback, sale of Asian assets, etc. A Google outsourcing deal brings $1 billion of more in increased cash flow and adds $6 to Yahoo’s stock, he says.
He’s also saying that an eventual combination with Microsoft is still 15% likely. Microsoft may come back to the table, he says, because “there is No Plan B to succeed on the Internet” (I agree). The weighted average is a $26 stock price. Yahoo is currently (noon PST) trading at $24, down about 15% from Friday. It started the day down 20%.
Mahaney’s full chart is below. I’ve also added his top level analysis of a Google outsourcing deal. Search revenue would grow from $1.6 billion to $2.7 billion (moving from 4 cents a click to 7 cents).
Compare Mahaney’s $26 price guess to the Fred Wilson’s informal crowdsourcing approach, which came in at $22. If the markets stay steady, the real price is nearly exactly the mid point between the two.
Crunch Network: CrunchBoard because it’s time for you to find a new Job2.0
Yahoo’s Black Monday Begins With Shares Down 20 Percent.
How black will today be for Yahoo’s shares? Following Microsoft’s withdrawal of its takeover offer on Saturday, shares of Yahoo took a 20 percent hit after the market opened this morning, opening at $23.02 (from Friday’s close of $28.67) but then started to edge up. That’s still well above the $19 per share that Yahoo was trading at when Microsoft originally made its offer three months ago.
If shares continue to drop, this could turn out to be a rough day for Yahoo shareholders. However, if the shares don’t drop much further, that could mean Wall Street is still pricing in another takeover attempt from Microsoft or someone else, or perhaps a Google advertising deal.
How low can Yahoo shares go, or is that it—a $5 drop?
Crunch Network: MobileCrunch Mobile Gadgets and Applications, Delivered Daily.
Yahoo’s Yang Speaks, Notes That Glass Remains Half Full
The most notable news this Sunday is what didn’t happen - no Yahoo/Google search deal was announced, meaning there is literally nothing standing between Yahoo and the unholy beating it is going to take when the markets open tomorrow morning.
Yahoo CEO did write a blog post on Yodel Anecdotal today that added to yesterday’s brief response to the Microsoft bid withdrawal. Upbeat in tone, it points to the many product announcements that Yahoo has made recently (Buzz, OneSearch 2.0, voice-activated mobile search, video on Flickr, Shine), product previews (AMP!, SearchMonkey) and the acquisition of Maven Networks.
He also suggested that Microsoft’s version of the negotiation timeline was “nonsense and misinformation,” countering that the Yahoo board “took its mission very seriously.” At this point, that’s really up for the lawyers to work out, as the shareholder lawsuits start to roll in.
Yang says that moving forward they’ll focus their energy on “growing our industry leadership and maximizing value for stockholders.” In many people’s opinion (including mine), they would have maximized shareholder value by simply accepting Microsoft’s offer back in February. Before all the costly severance arrangements, layoffs and high profile employee defections.
One thing Yang gets unambiguously right in his post is when he says “we know the spotlight will probably stay on us for a while.” that’s a certainty. All eyes are on Yahoo. If they stay independent, I certainly hope they nail execution and show that they made the right decision for their users and shareholders by declining Microsoft’s offer.
We’ll check back in tomorrow morning as the markets open to see whether the stockholders agree that Yahoo has “emerged a stronger, more focused company with an even greater sense of purpose” after this ordeal, or if they’re left a skeleton of their former selves, with shell shocked employees who don’t know up from down.
Yahoo’s glass may indeed remain half full. But the markets were expecting to see a Yahoo glass overflowing with Microsoft dollars tomorrow morning. A half full glass gets a half full stock price.
Crunch Network: MobileCrunch Mobile Gadgets and Applications, Delivered Daily.
Yahoo Prepares For A Black Monday
As everyone digests yesterday’s extraordinary news around Microsoft’s withdrawal of their Yahoo bid, the big rumor around the valley is the Yahoo is frantically trying to negotiate a deal with Google to outsource search advertising and get it announced before the markets open tomorrow.
Yahoo-Google?
It’s not clear that Google still wants to do such a deal now that the immediate threat of a Microsoft/Yahoo deal is gone. The reason - the almost certain regulatory review (even Congress has taken note) And even if they are still willing to talk, Yahoo has lost the lions share of negotiating leverage. That means a lower revenue share, a shorter term deal, etc.
If Yahoo and Google reach a deal, it’s possible they could at least argue for a case that Yahoo’s value should increase to $37/share (but the markets won’t buy it): based on analyst projections, Yahoo could increase cash flow by $1 billion or more by outsourcing, and increase revenue per thousand search queries to as high as $90 from the current $40 or so. Combine that with massive headcount reductions (Yahoo won’t need their search marketing employees any more, possibly 2,000 employees), and Yahoo could have short term bottom line gains of well $1.2 billion or more/year.
With a trailing P/E of almost 40, That extra cash could, theoretically, boost their market cap by more than enough to reach their goal of $37/share.
That’s the theory anyway.
In reality, even if a deal is announced, the markets will factor in the risk of regulatory veto, as well as the long term negative effects of giving away the search marketing business to their biggest competitor.
And Yahoo’s true market value today remains in the $19/share range, or about $26 billion, now that the Microsoft crutch has ben removed. A good chunk of that - $10 billion or so - is actually from their Alibaba and Yahoo Japan holdings.
So Yahoo and Google may do a deal or they may not - but either way it isn’t going to help Yahoo’s share price as much as they hope.
Angry Shareholders
We also expect Yahoo to announce their delayed annual shareholder meeting early this week, and actually hold it as early as late June. When it’s announced, shareholders have ten days to propose an alternate slate of board members. Microsoft says they are sitting on the sidelines, but a group of angry stockholders may now emboldened enough to make their own effort to change company management.
To say that shareholders are angry is an understatement. They made it clear to anyone who’d talk to them that they would be more than happy with Microsoft’s $33/share final offer. Legg Mason, Capital Research, T. Rowe Price and others all reportedly strongly wanted the Microsoft deal to happen.
Crunch Network: CrunchBoard because it’s time for you to find a new Job2.0