Microsoft / Yahoo: Dead? Dithering? Drunk?

There are huge cross-currents on the Microsoft/Yahoo deal after this week's earnings news from the two companies (see transcripts here and here). What we discovered, in effect, was that what we have here are two drunks holding each other up.

Why? Because both companies' businesses are squishy and doing somewhat worse than expected. Yahoo (YHOO) wasn't able to pull out a big beat, and Microsoft (MSFT) wasn't able to deliver the quarter expected, largely because of Windows weakness (which I think is a bigger issue than Windows piracy). Even if this would be a horrifically messy combination to bring off, the two companies need each other.

So, here are the options:

• Microsoft walks away, for now or permanently
• Microsoft ups its offer in next 72 hours
• Microsoft "goes hostile " (feel free to say "ooooh")
• Yahoo announces a deal with someone else.

Granted, some of these are overlapping, as Yahoo could still announce a deal with someone else while Microsoft ups it offer and/or goes hostile. Nevertheless, you get the gist.

What do I think happens? Tough call, but I think Microsoft walks away, hoping to come back with an offer at a lower price after bottom falls out of Yahoo's shares again. I just don't buy that Microsoft walks away permanently, or that walking away now is anything other than a transparent stratagem. They have had every opportunity to negotiate a higher price, and Yahoo has demonstrated no willingness to countenance one, which will make Microsoft highly reluctant to float one unilaterally and negotiate itself.

Nasty situation. And, more broadly, a business travesty, with both Yahoo and Microsoft squandering business franchises.

Comments

[capgain:]

Steve Ballmer didn't call me to ask for my advice, but he would be well advised to let the offer lapse as of Saturday as previously promised, with a further notice that a new, lower offer will be proffered next week. Then, sometime mid-week, offer YHOO shareholders a choice...either $29 cash or the equivalent of $31 in MSFT stock, with a window of 60 days to let them get on management's ass. At this point, YHOO shareholders should be smart enough to realize that the world is fresh out of white knights!!

2008 Apr 25 03:10 PM

[Malkiel:]

You have that exactly right, these guys have franchises and don't know what they should be doing. Microsoft has spent way too much energy trying not to be a software company when it's the world's most successful software company and ought to be milking that for everything it's worth. Their obsession with "web-based services" always seemed decades premature, but buying Yahoo could provide them the instant gratification they're looking for. The problem is, Microsoft has a history of giving up on every initiative where they encounter resistance. MSN, Office online, digital signatures, buying Yahoo, you name it; if it's the least bit hard, they've given up on it. This institutional inhibition against risk probably explains their congenital defensiveness toward criticism and Ballmer's ridiculous public posturing. It's all for show, there's no go...

2008 Apr 25 03:46 PM

[oceandude:]

If MS walks away Yahoo will be swamped with shareholder lawsuits, as they should be.

2008 Apr 25 04:04 PM

[User 154359:]

I own MSFT shares and I am by now sick of all this Yahoo this/that... all the head honchos at MSFT are being distracted. The stock is trading about 10% lower because of this major distraction.

Dear Mr. Ballmer, play hardball with them. YHOO got a really great offer. Just look at what Wendy shareholders have been "rewarded" with by Arby's parent company. Something like 5% !

BTW: Yang is Chinese-American and the ethnic background plays a role in this BIGTIME. My SO is Chinese, so I know better. Pride is important to them. And Yang's EGO is offended by this offer. That's why all this resistance and holdup.

2008 Apr 25 04:06 PM

[DP:]

oh please, he might be a proud person,
but he is smart enough to know that when it comes to $45bil. company, ego needs to be put aside.

2008 Apr 25 05:32 PM

[TA:]

No he doesn't - if Yang, did he'd have taken the offer.

Shareholder value destruction on this level, can only be done with excessive ego.

2008 Apr 26 01:00 AM

[Just the fa...:]

Paul, Your premise is weak. Microsoft provided guidance consistent with the notion that there are no more cookies in the jar. As you well know, companies can make up just about anything, and call it guidance. By calling Microsoft's numbers "squishy", you just bought into their game. I took the opportunity yesterday to buy Microsoft on the dip.

You also missed another very viable option - tender offer. See how many shares are tendered - and then make your case on price.

2008 Apr 26 10:54 AM