Yahoo Finally Catches a Bid. The Deal Is Done.

Yahoo is finally catching a bid. This time, of course, it's coming from Microsoft, rather than investors enamored with the struggling search/content/advertising company. Early this morning The Company That Bill Built announced an unsolicited $44.6-billion deal for Yahoo, which is the sort of thing, as I said here earlier this week, the only practical upside for YHOO stock right now.

Okay, but is it a good idea? The honest answer is Yes, but investors shouldn't expect much. Tying two share-losing rocks together -- both companies are losing market share in search and in search-related advertising -- won't make them fly. The trouble, of course, is that MicroHoo would have much more scale, but a size problem is not why the separate companies are struggling against Google. Nor is it about innovation, which is what Microsoft' Ballmer said on the call, where he lauded Microsoft Labs' research prowess, and double-lauding how lovely it would be to have the two organization's propereller-heads under the same roof. Wrong again.

The answer is that Google is dominating a tipping market -- search and online advertising -- and consolidation among competitors is about the only rational response. A combined Yahoo/Microsoft would become a truly material piece of the ad market, in excess of 40%, which is enough for it to finally offer Google a credible threat.

With respect to the price, no-one else is likely to emerge. Regardless of whether Microsoft is getting Yahoo for a great price, as some will say, there is no credible counter-bidder out there, especially not Google. At the same time, private equity bidders, who had been mulling Yahoo bids, will be put off by Microsoft's cash horde, and its strategic intent, which would in any case keep a Microsoft bid out of reach of financially-driven PE pricing.

My take: This deal will happen, and it will happen at this price. Yahoo has no choice, because shareholders will beat it blue if Jerry, et al. don't take the money. That said, it doesn't make me any more optimistic about the combined company's future in search & online advertising -- Microsoft still thinks it's about research spending, which I have refused here before -- so forgive me if I don't expect Google's share price to fall through the floor this morning (more than it has from missing earnings last night).

Some questions I'd still like answered:

• What was Yang's reaction last night to Ballmer's call with the offer?
• What are the specific cost-synergy plans? And if any more smoke-blowing goes on about combining two great research organizations I'm going to hurl.
• What are the integration plans? The nightmare non-synergy scenario is preserving both company's advertising and search platforms.

Update 1: Some other quick thoughts on the proposed $44.6-billion deal Microsoft deal:

• Microsoft claims a billion-dollars in synergies from scale, operational inefficiencies, etc. Let's be charitable and say half of that will come from layoffs. That works out to roughly 3,000 people, or even a little more, depending on how you count costs.
• Early this morning Goldman made an awfully timely call, putting out an analyst note at 3:56am PST suggesting that Microsoft should buy Yahoo -- only to freeze analyst coverage of Microsoft at 6:55 AM PST on the news that Microsoft has offered to buy Yahoo and it is providing i-banking support. Yay! Boo! Yay! Or something.
• While the deal has to happen, I'm still not convinced that giving the combined companies a larger search presence is linear (or even geometric) improvement in MicroYoo's attractiveness to advertisers, as some argue. My sense is that most people use Google because they like it and it works, not because they can't find Microsoft or Yahoo's comparable service.
• This is good news for Google, of course. It gives the company carte blanche for other large acquisitions, if needed, and, more importantly, it means that two elephants will be busily mating out back so that it can march merrily in the confusion to further share gains in both search and advertising.

Update 2:  Last post for a while on this, unless news breaks, but something just for fun: Let's say you're advising Jerry Yang and the Yahoo board, and they don't want to do the deal. What would you advise them to do?

Anything about value-creation, 100-day plans, and strategic arm-waving won't fly. That sort of thing will have shareholders at your metaphorical door carrying pitchforks and waving lawsuits. Killing the deal requires immediate action, not fuzzy happy-talk about Yahoo's inimitable wonderfulness. Even big layoffs wouldn't likely do it, as it would be seen as a scorched-earth strategy intended to break the company, not fix it.

So if you wanted to kill the Microsoft deal, what would it take? In a word, Google.

Your recommendation to Yahoo would be that its single and best option is to immediately cut a deal with Google to outsource Yahoo's floundering search platform. Yahoo would maintain content, community, etc., and all search would go to erstwhile competitor Google. Given higher and better monetization, and reduced costs on search engineering, the hypothetical anti-Microsoft deal would likely be a 15-25% bump to Yahoo's value. Granted, it doesn't create as much short-term value as Microsoft's outsized bid, but it is coherent, timely, and constructive.

Ironic, huh? Yahoo needs Google to save it from Microsoft to save it from Google. It's about as convoluted as last night's Lost season premiere, but it does make its own sense.

Update 3: Like a few others, I heard buzzing today about at least one other imminent Yahoo bidder, allegedly in private equity, having forced Microsoft's hand (and price). Let's just say that if that rumor was true, Microsoft's high Yahoo offer -- based on strategic considerations, not financial ones -- will pretty much close down that path.

In other words, while it would be interesting, as it would explain some of Microsoft's tactics (as well as some of the wording in its letter to Yahoo's board around having financing in place), I wouldn't expect a Yahoo bidding war now predicated on a private equity player.

Comments

[User 86999:]

"Yahoo Finally Catches a Bid. The Deal Is Done."

Is it? What nonsense is update 3 then? What are you smoking? Pass that on, I want some too. :-)

2008 Feb 02 06:55 PM

[Tom B:]

"Yahoo has no choice, because shareholders will beat it blue if Jerry, et al. don't take the money."

Rubbish. Any shareholder disenchanted with YHOO's performance had an outstandaning opportunity to take profit Friday. If I were on Yahoo's BoD, I would be fully cognizant of this and I would refuse MSFT's hostile offer. Yahoo has a MUCH better chance of seeing better times as an independant company than as a chattel in MSFT's empire.

2008 Feb 02 09:15 PM