Ballmer to Yahoo: Feudalism Is Dead

Yahoo (YHOO) shares were down after hours on Friday on speculation that Microsoft (MSFT) would step up and make a power play to expedite its seemingly stalled takeover offer. That rumor was confirmed Monday afternoon when Microsoft CEO Steve Ballmer's letter to Yahoo's Board of Directors was released, saying Yahoo had three weeks to accept the offer or prepare for a proxy fight.

In his letter, Ballmer notes that the general deterioration of the economy of late makes Microsoft's offer of a massive premium for shares seem even better – as we noted back when the offer was first announced, the offer price ($31/share for YHOO) implied massively accretive cash flow growth quickly upon consummation of the deal. When one considers the exorbitant valuation being offered, it becomes clear that this is a classic case of a bear hug gone wrong because Yahoo's Board can wring more money out of the company from director's fee, etc. than it could through gains from selling their personal share holdings at Microsoft's price. This is what happens when your insiders aren't large holders of their own stock.

The spread between what Yahoo is worth to Microsoft and what Yahoo is worth to any other investor – control or non-control – is enormous. Markets exist so that goods can find their best and highest end use, and Microsoft is willing to put up $40 billion for Yahoo. Collectively, no other buyer(s) has shown a willingness to be in the same neighborhood as that number, which is why it's nuts to allow Yahoo's Board to pretend that the company is their personal fiefdom where they exercise their benevolence on behalf of the peasantry… err, common stockholders.

Knocking Microsoft is almost a national pastime, but I think far too many people underestimate the company. No counter offer emerged because (I'll say it again) Yahoo is not worth more to anyone than Microsoft – so at this point, Microsoft would be bidding against themselves in an environment that is not conducive to M&A activity. Ballmer knows this, and that is what his letter is conveying.

You can read the notes Yahoo CEO Jerry Yang has sent out on the situation (see the Reg. FD filings), but what you read makes me question the degree of disconnect between his vision and reality: Yahoo is not the internet search company with momentum, Yahoo is not the internet company with the most valuable brand name, and Yahoo is not the internet search company taking share in online advertising. Yahoo's management has not been able to change those trends. So for all the bad things that are said about them, I trust Microsoft not only to give Yahoo's shareholders the best deal, but to use the assets in place there to create the greatest possible profit. Feudalism is dead, welcome to capitalism.

Disclosure: None

Comments

[Tom B:]

MSFT is AOL, a has-been company puttering along on an eroding business model. Yahoo is Time Warner, a pretty "flat" content company. This deal is worse than AOL-Time Warner; it will utterly destroy Yahoo, worse than MSFT already mismanaged HotMail. Or the Zune franchise, for that matter. Or IE. Or MSN. Or Vista. Or XBox. The only silver lining is that, at the end, MSFT will be dead, too. People keep forgetting that Ballmer is simply a blow-hard "empty-suit". NO record of execution.

2008 Apr 08 08:53 AM

[??:]

(copy-and-paste my earlier comment)

One man's garbage is another's treasure.

YHOO may be your garbage stock, but for MSFT it's the treasure for fighting with GOOG.

I don't understand why people don't understand this point.

2008 Apr 08 09:00 AM

[Bexar:]

I own 5000 shares of Yahoo and I think it is near criminal what the Yahoo board is doing to me and all the other shareholders.

2008 Apr 08 09:12 AM

[AKA:]

The internet nowadsy is overflowing with comments from the equivalent of M&A Monday morning quaterbacks. And their lack of knowledge on intrinsic deal value is pitifull. To even suggest that YHOO's Mgt. and its BOD are out of touch with reality in dealing with the MSFT offer is laughable, to say the least. There is only one site in the entire world that captures over 500 million eye-balls on a daily basis. And MSFT's failure to make any real gains on its internet strategy gives YHOO a strategic value that goes beyond economic value considerations. MSFT's failure to take over YHOO on friendly terms any time soon will keep MSFT trapped in a software-dependent business model that is going no where. Money will not buy you love, but it certainly can buy you the kind of growth that MSFT will not get out of its software-based business model.
You can bet anything you want that MSFT will pay anywhere between $36-$40/share to get YHOO, and will do so gladly, with a big smily on its face.

2008 Apr 08 09:19 AM

[yankini:]

If my vacant land behind your house (with no backyard) adds a backyard to your home, I will simply ask for higher than market price because of the value it would bring to your house. I don't know why these bloggers think Jerry Yang is making the decision. If it is true why would they spend millions on hiring prestigious M&A advisers? Bloggers seem to think they qualify to judge a company from its last year's balance sheet. I hope this decade would be a blog-bust that would lead to more accountable reports.

2008 Apr 08 09:43 AM

[Opinion:]

YHOO's worth is what it's worth for MSFT.
For MSFT YHOO is priceless, because without them MSFT does not have even a chance to enter the online world. MSFT has failed all attempts on it's own.

Welcome to this century, MSFT.

2008 Apr 08 01:43 PM

[Jonathan Scott:]

No one has made a higher bid, and MSFT should raise its bid? This makes no sense. Luckily, YHOO rigidity will be broken by stockholder involvement, and MSFT will get the company.
Regarding MSFT's floundering, companies have come and gone, and MSFT is still here; they must be doing many things right and it is reflected in MSFT's balance sheet.

2008 Apr 08 07:40 PM

[delta 777:]

Whatever the price is, I can't see where delay is of any help to either company, in fact it is costly to both..
I suspect that if Yahoo had accepted Microsoft's initial offer, (or had made an immediate firm and reasonable small counteroffer) the time value would have made up for any sweetening of the offer that might be reasonably expected.
Yahoo's pimping itself out to other "clients" certainly did not strengthen their bargaining position.
The current economic situation is not one that favors long and drawn out negotiations.
Ultimately if Microsoft still sees it in their best interests to acquire Yahoo, they will prevail, and at Microsoft's price.
Yahoo has not been known for brilliant decisionmaking at the highest level...witness the origins of Google....

2008 Apr 09 12:34 PM