Ballmer: 'Nobody Gets' the Microsoft-Yahoo Deal

Microsoft CEO Steve Ballmer said Thursday that no one quite gets the software giant’s search deal with Yahoo (YHOO). Speaking at Microsoft’s (MSFT) financial analyst meeting, Ballmer said he was surprised by the market reaction—Yahoo shares tanked—to the search deal.

Ballmer said he wanted to provide his full explanation of the deal and “body English on the issue.”

He didn’t have to worry about the body English part. Ballmer was animated as usual. When it comes to the Microsoft-Yahoo search deal “nobody gets it.”

Overall, Ballmer argued that the partnership is about product, customer and revenue improvement. Yahoo gets to focus on being “the leading online media company in the world.”

OK, maybe the economics are a bit muddled. Ballmer said:

Economics is where people get even more confused. What happened? Nothing got bought. Nothing got sold. People expected something to get bought. Nothing got sold yesterday, and nothing got bought yesterday. But the partnership in and of itself creates economic value.

How? The search product will improve and the ad market will become more liquid.

“Our cost of good sold will be lower on search,” said Ballmer, noting “more liquidity that will improve monetization.”

On the Yahoo side, Ballmer sounded thrilled about the economics—for Yahoo. Ballmer said:

On the Yahoo side — this is the one that stuns me that people haven’t figured it out. Yahoo gets 88 percent of the surge revenue they have today. They have 0 percent COGS (costs of goods sold) against 88 percent revenue and they have no R&D expense and no ongoing cap ex. It’s sort of like unbelievable. You know, I don’t know what you say because they’re focused. But did they sell their search business? No, they get to keep 88 percent of the revenue. That sounds like they didn’t sell and I’m not selling against interests. I just think this was a win-win partnership.

And they (Yahoo) said yesterday that they expect their operating income to go up by $500 million on full implementation. Remember, this is a company that makes $700 million. So you’re talking about a 70 percent profit expansion just from doing the deal.

And Ballmer noted that folks aren’t accounting for potential increased market share, more ad liquidity and product improvements.

Do you get the deal yet? I do, but there’s a lot of regulatory and implementation wild cards before I can get as wound up about the Microsoft-Yahoo search deal as Ballmer does.

Comments

[Egg:]

Au contraire...

Everyone "gets" the deal. It's just Yahoo was priced for something more. Either a complete merger or at least the boatloads of cash promised by Carol.

I actually think Ballmer knows that all too well and his statements are just a face-saving gesture for Yahoo management. He doesn't want to rub the reality in anymore than WS already has.

Jul 30 04:35 PM

[doodoo:]

From what I know about search MSFT hasn't made a dime from it so $500m seems like a ton to me.My thinking is about how much MSFT is going to profit and I didn't hear any words on that subject.Ballmer to me is an idiot and I will be surprised if any big dollars flow into the MSFT war chest.I will welcome any surprises that come from this deal but have been disappointed at every turn by the degree of failed deadlines and products that don't live up to expectations.AKA the brown Zune,Vista etc.

Jul 30 06:06 PM

[PenName Dave:]

YHOO is just overvalued and while this deal will save them on COGS, in the long run they are giving up a big portion of their value.

Even after the stock drop of the past few days, YHOO is a 20B market cap company. Still a very high number for a company thats not a leader in any of its "spaces".

Jul 30 06:26 PM

[Track n Trace:]

I think Penname Dave's comment is completely backwards. Carol Bartz is absolutely doing the right think to get Yahoo back into the game. She is making an extremely strategic move which build the platform for Yahoo to dominate. By leveraging MSFT in regards to R&D, CapEx - essentially eliminating COGS - they will score 70% profit expansion to invest in what they can do best. This will not only give the company direction but will allow them to innovate into some serious competition for the Goog.

A bold and strategic move which I applaud Bartz for. The stock was way oversold by traders on short term outlook.

Jul 30 09:31 PM

[ain't no fo...:]

Steve, its not that "nobody gets" the deal... its that nobody gives a schit anymore... this thing has had more re-runs than a Seinfeld episode.

Get on with your life.

Jul 30 10:49 PM

[thevoice@vo...:]

Yahoo can now focus on what it does best, publishing news, entertainment, sports and email while comparisons to Google should slowly dissipate. What is important to remember is that Yahoo is retaining 88% of the revenue for the first five years while its cost is zero, not a bad deal. Lets not forget what Yahoo aims to become .....Yahoo TV

Jul 30 11:47 PM

[sethmcs:]

Use Yahoo everyday. Don't read ads. Don't patronize advertisers. As a matter of fact I have trained my brain to ignor all internet advertising. Am I the only one?

The story of the Trogan House comes to mind in this deal. Merely give up 22% of your revenue. Great deal? Or a deal you can't refuse?

Jul 31 01:37 AM

[Hamster:]

I guess the blind eye has been turned when you think of a deal with MS. History has shown that MS has screwed every partner it's ever had so why would this be any different? Yahoo shares showed the true value of partnership with MS. Ballmer is a fool to think Yahoo would benefit. MS stocks still dump, and now brings Yahoo down with it. Just look at the options, it tells the story right there. Anyone who thought a merger were in the works knew that a take over would have pushed the options into the 30's range. A partnership pushed them into the toilet. BING sucks and I don't know what everyone is so happy about. Vista numbers are all down and MS already gave up support on it due to it being so crappy. They are hoping Windows 7 will bail them out but any one with half a brain knows that Windows 7 is Vista revisited. Anyone willing to argue that Windows 7 is different also must think that this partnership is a blessing. I wish I were wrong but I have absolutely no faith in any partnership where MS is one of the partners.

What really hurts is that this was an inside job. The board of Yahoo has been suckered in from the inside. What is Yahoo if not a search engine? You fools who think that MS will continue Yahoo's search engine obviously didn't read the fine print. Yahoo search will become BING search. And the rest of Yahoo will fizzle out. 88% retained earnings for 5 years, you total sell out. You won't get jack for the first 5 years, then after you've been sucked dry MS will fold BING because it sucks and in time, it will show. Yahoo will cease to exist past the 5 years.

Carol Bartz is a sell-out and traitor to Yahoo investors. She gained this position on purpose to sell Yahoo short because she's taking a big payout from MS to betray them. The sad part is it was no secret that she's been in talks with them ever since she took this position.

Jul 31 01:57 AM

[Hamster:]

Just the opposite. Bartz is a traitor and sell out. Since she took this position she's been whoring with MS and it's no secret. She used her position to sell Yahoo's soul. Leverage my a*$$. Look at the numbers. Check the stock value in the next few days and tell me if it's heading in an upward manner. On the news alone of the partnership, it dropped. MS itself stand to gain by Yahoo's stupid board of idiots. Ballmer is just a moron and 'yes' man. he'll say anything because he's a parrot. And what does he care, as long as he gets paid, he couldn't care less who runs the company. And Carol, she isn't worth the spit in my throat.

Could I do better? I believe I could. First I wouldn't settle for any type of term contract. Also, with the partnership I would insist on keeping Yahoo secretes secret. I would insist on a partnership where Yahoo would stand to benefit. An 88% of what? Revenue generated for the next 5 years? 12% to MS pockets plus their research and Development? Let me see, BING turned out to be trash. Vista turned out to be a disaster. Windows 7 is Vista revisited and there isn't a company in US willing to touch it, at least until the first SP1 comes out or their IT department would really recommend it (doubtful). DID anyone here know that MS itself borrowed money?

Like I said total sell outs on the board of Yahoo. I feel sorry for the employees. In 5 years time, they will no longer have a job.


On Jul 30 09:31 PM Track n Trace wrote:

> I think Penname Dave's comment is completely backwards. Carol Bartz
> is absolutely doing the right think to get Yahoo back into the game.
> She is making an extremely strategic move which build the platform
> for Yahoo to dominate. By leveraging MSFT in regards to R&D,
> CapEx - essentially eliminating COGS - they will score 70% profit
> expansion to invest in what they can do best. This will not only
> give the company direction but will allow them to innovate into some
> serious competition for the Goog.
>
> A bold and strategic move which I applaud Bartz for. The stock was
> way oversold by traders on short term outlook.

Jul 31 02:13 AM

[achates:]

"a company thats not a leader in any" is simply not true - Y! is a dominant leader in e-mail, news, entertainment news, and in a number of its media properties (<gigaom.com/2009/07/16/...;).

Shares were run up over the last week on speculation that the deal would happen and that the deal would drive share prices up; the deal wan't what the speculators were hoping for, so they dumped. No mystery.

There are strong arguments for the deal, and the deal appears to be structured very carefully to support those arguments. It will be interesting to see how execution plays out.

Jul 31 08:35 AM

[Track n Trace:]

It sounds to me like Hampster was one of those who got burned by speculation on the whole deal. A whole two articles? Really? Wow. I wish you included some real data to support your ranting.

Jul 31 09:59 AM