Yahoo Shouldn't Have Rejected Microsoft's Offer

Before David Filo and Jerry Yang went to talk to Microsoft (MSFT) in an effort to finalize a deal to sell Yahoo (YHOO) to Microsoft at a share price above $37, they should have stopped and visited Apple's (AAPL) Steve Jobs.

Microsoft, Gates, Ballmer and company are very adept at co-opting competition or crushing it. Jobs failed to "cut a deal" with Microsoft in the 1980s and Microsoft walked. Instead, they developed their own Apple like interface and beat Apple at its own game.

It took years for Apple and Jobs to recover, and that was Steve Jobs, a visionary and astute marketing genius, not Jerry Yang.

Jerry, you may have been an innovator, and you may have made $2 billion, but you are no CEO, and you certainly did not look after the interests of your "common" shareholders.

Steve Jobs could have told you that Microsoft put you in a no-win situation. Ballmer offered to buy you for a 70% premium over the market, and you turned it down? Sure, they wanted to do a deal with Yahoo to challenge Google (GOOG). But what you did not realize was that Microsoft is in third place in search. True, teamed up with Yahoo, they could challenge Google's supremacy. But what is the next best alternative? Well, what about knocking out number two. 

Let's look at a possible theory behind Ballmer's strategy. Say I am Ballmer's secret and independent CEO adviser. Steve, go ahead and make an offer. Try to get it on the cheap - offer some cash and some stock. That will cause Yahoo's share price to stop its downward trend and jump about 10 points. We have excess cash. Sure, some may not like it. But you can sell Yahoo's Asian interests and recoup some, if not all, the cash. Then, you are basically buying Yahoo for say, $20 of Microsoft stock. Your stock may suffer a small decline, but Yahoo would provide Microsoft a head start on taking on Google. Also, you will still have about $30 billion in cash and cash flow of $2-3 billion a month. Yahoo has $4 billion in cash.

Won't the key people at Yahoo quit? Well, Steve, pay the key people to stay and fire thousands of overlapping people to pay for it, and you will probably come out ahead. You will still have their existing platform and customer base. Form a separate division and give them a cut of the action.

But what if I spend all that time and they don't accept my offer? Well, Steve, no, they really can't turn down the offer. They can't team up with Google because of anti-trust concerns. What would a combination with AOL (TWX) do? Two sinking boats can't rescue anyone. Terry Semel couldn't help them. What experience does Yang have in running a company? Well, he hasn't helped them yet, except for dropping their stock to a multi-year low.

But what if Yang tries to be hard headed and save his job, his buddies' jobs and the "Yahoo way of life"? That's the beauty of it, Steve. You win too. The stock will collapse. Yang will look, at best, self interested and foolish. Shareholders will revolt. Employees, who just saw their stock and option compensation reduced or eliminated, won't be happy. Hedge funds and mutual funds won't be happy. Yahoo will be distracted with fighting inevitable lawsuits for failing to fulfill its fiduciary duties to shareholders. They will spend too much time trying to forge other partnerships to support Yahoo's stock price and will effectively destroy their own business. Sure, Google will get some of their business, but you now will have only one competitor to target, and that is where the real battle will occur.

You will still have almost $40 billion in cash. Just wait for a while, and then offer a stock deal for $20-22 or lower later, if you still want their platform and customer base, cheaper. You won't have to wait long.

The beauty of this, Steve, is that you let their ego and selfishness get the best of them. It will cost you some legal expenses and some negotiating time, but you win both ways. You get their platform or they will be distracted for years.

Surely, Steve, you remember that strategy? Right?

But what if they talk to Jobs? Steve, that could be a problem. But there are two answers to that question. Jobs doesn't tallk to anyone, and if he did, he will never admit that he lost the Microsoft-Apple war anyway. Also, you need to remember one key attribute of the super rich, like Jerry or even you and Bill. They think they know everything.

But what if Yang does talk to Jobs? Well, if Jobs really wanted to help them, he would say, Jerry, you were a visionary and made billions. Sell the company to Microsoft, make your shareholders happy, and go invent an animation studio or a device to revolutionize how music is sold. Let Ballmer have the headaches of taking on Google. Accept their offer and leave with all your key people and do something else.

Damn, we sure don't want him talking to Jobs then. Steve, don't worry, he won't. Remember the first rule of the super rich -- they know everything.

Hey, but what if we actually get Yahoo? Steve, you can't be like Jerry and compete in Google's box. You need to come up with real innovation. I have a great idea on how you could dominate search and online advertising by not only increasing search advertising revenue but also getting a small percentage of sales related to the search and have 100% customer search loyalty without competition.

That sounds great, what is it? Well, Steve, we have to negotiate over that one.

But I don't want to pay for it.

And that, Steve, is the other problem with the super rich - they never want to pay for anything either.

Disclosure: none

Comments

[John from C...:]

Good article. I wouldn't think that those guys were that sneeky, but I think that strategy could work. Yang needs help, maybe he will pay you to help. What should Yang do now?

2008 May 05 04:49 PM

[Alien:]

Superb words thats the playbook right there.

2008 May 06 01:13 AM