Microsoft Should Drop Yahoo Bid by a Buck

On Wednesday, January 30, 2008, before Microsoft's (MSFT) announced bid for Yahoo (YHOO), I blogged after Yahoo's dismal earnings conference call that, "maybe the smart thing to do at this point is to try and sell it to Microsoft as fast as they can while they can at least still get $19 a share, it's a heck of a lot better than $6 a share."

Subsequent to that blog post, Microsoft came out on Friday, February 1st, 2008, with a bid to buy the company for $31 per share. This offer is the biggest possible gift Yahoo shareholders could have hoped to receive. Instead of watching their stock price continue to plummet they were being offered a way out.

Rather than accept this generous offer, though, Yahoo has rebuffed it and instead is grasping for straws of any possible out to a Microsoft takeover. In my opinion this is more about Jerry Yang's ego than it is creating shareholder value. And because of this, rumors of shareholder lawsuits have surfaced, and more significantly, much of the top talent at Yahoo has been leaving in droves.

So it was interesting to me to read Henry Blodget Wednesday morning suggesting that Microsoft might in fact *lower* their bid for Yahoo.

"As the weeks drag on, Yahoo is making it clear that its response to the Microsoft bid will be the same as its response to almost everything over the past 8 years: analysis paralysis. As Yahoo carefully explores the details of every possible non-Microsoft option, the macro environment--and, likely, Yahoo's performance--gets worse. If, after Q1, Microsoft decides to pull the bid, Yahoo's stock will plunge to the high teens. And if that happens, Jerry Yang will be alone in his celebration."

If you recall, I suggested back about a month ago that Microsoft ought to drop their bid for Yahoo by a buck in light of Yang's dragging his heels and in light of the fact that this posturing was causing top talent to leave Yahoo, resulting in a less than optimal merger situation.

The more Jerry Yang vilifies the Microsoft bid and the more talented engineers and executives leave Yahoo, the less Yahoo is worth. And if this quarter's earnings look as bad as last quarter's did, then in the end Yahoo may do far, far, worse than the $31 per share bid from Microsoft.

I think a lot of cost cutting is probably going on at Yahoo right now to try and make sure in the short term that this quarter's earnings aren't horrible. This cost cutting probably has the effect of continuing to reduce morale and pushing talented people out of the company.

On a total anecdotal basis, it is interesting to see Yahoo's Flickr Turns 4 Party this year. Last year, for their Flickr Turns 3 party, Yahoo hosted the party at the Yerba Buena Center for the arts, an upscale swanky San Francisco art museum. The event was all ages and the bar was open and free (beer and wine and soft drinks).

This year the party is being hosted at the much smaller and probably cheaper venue 111 Minna and is only for people 21 and over. I wonder if the bar will be free this year like it's been the past three years or if the party crowd will be paying cash.

I'm not saying that the budget for the Flickr party was cut, but I do wonder what type of cost cutting efforts have been put into place at Yahoo this quarter to try and make those numbers come out as good as they possibly can. Because if earnings on the next earnings call are dismal, Henry Blodget might be right and the new bid for Yahoo might be quite a bit lower than the old bid at $31 per share.

Of course Yang could always reverse course at this point, especially in light of the fact that there appears to be no white knight coming to save him and his top talent is leaving. But reversing course and embracing the $31 per share offer at this point would mean eating crow and his ego just might not be able to take that.

But hey, what do I know?

Comments

[curious1]

Any source for your following statement ?
"much of the top talent at Yahoo has been leaving in droves"

Will appreciate. I have seen same sentence so many times.

[RO]

Jerry Yang and his 'large ego'? Why don't you put yourself in his shoes? He's just trying to not allow the company he started to be taken over by Microsoft. What's wrong with that?

[mobajwa]

R:
Well jerry had a fair chance I guess... and besides that we are talking from a shareholders perspective.. right ? i don't care if jerry's dreams' are shattered.. i need to make money of the stock ! i believe 99 % of the investors would agree..

[Tom B]

"Any source for your following statement ?
"much of the top talent at Yahoo has been leaving in droves"

Will appreciate. I have seen same sentence so many times."

The "top talent" would have ZERO desire to adopt MSFT's 3rd rate server technologies, I should think. Do you have any idea how much the performance of HotMail plummeted when MSFT moved it off BSD UNIX?

As for the rude and obnoxious proposal for MSFT to go EVEN MORE hostile by lowering the price-- surely that would infuriate every single Yahoo employee and stakeholder. The value of Yahoo is not related to 1Q; it is based on the future potential of the company. I can't say what that value IS, but it could easily be more than $31/share.

[reader]

I have read with some puzzlement that there are those who think that the "true value" of yahoo is much greater than $31. Please tell me, where is your proof. Has anyone, even remotely, come close to showing any interest in this company. I think the answer is a resounding, NOOOOOOO!

This is just business ladies and gentlemen and that can be nasty sometimes. If I were MSFT I would let it be known, not necessarily out loud, that you have only so much time left before the offer price does drop that one dollar. This may give a greater boost to those shareholders, who already think the $31 offer is sufficient and should be accepted, to get a deal done.

[yankini]

Yahoo talent is already leaving by the droves is not true now but it will be if MSFT makes a lower bid. Then MSFT will get exactly what it pays for: lazy, unmotivated bunch of engineers who have no clue about what's going on! remember, you always get what you pay for. Silicon Valley has plenty of companies looking for bright people whereas Redmond, doesn't!

I don't know why every talkhead thinks microsoft will do yahoo better. Microsoft already has properties that yahoo has plus enormous cash. Yet they haven't been able to catch up. So, how in the world they can help yahoo stand up against google minus yahoo talent?

[Tom B]

"I don't know why every talkhead thinks microsoft will do yahoo better."

What has MSFT EVER got right? What, specifically, has Ballmer ever executed well?