Why Jerry Yang Needs To Drive a Beer Truck

Jerry Yang commented in several interviews today that he did not understand why Microsoft walked. He was more than willing to continue negotiations. He made the classic blunder made by everyone who has emotional ties to their assets - he overestimated their value.

Let me give you a couple of examples from my personal history. When I was a graduating senior in college, I had just taken the CPA exam and was getting ready to go to law school. I had even locked down a summer job to help pay for it.

My job, which some of my friends thought was the greatest job in the world, was to work for Pabst Brewing Company. Pabst had waited a long time to fully join the computer age, so they hired me to review, compile and organize over seven years of handwritten sales receipts. Sounds terrible, huh? Well, it was devastatingly boring, even with the added benefit of being able to drink beer all day for free.

They gave me a desk in the office of the City Sales Division, where I toiled away for some 12 hours a day, six days a week. I was getting $5.00 and hour with no overtime and all the beer I wanted. One of my added responsibilities was to check in the beer truck drivers as they finished their daily routes, so I got to know a lot of them personally.

Now sit down, because you won't believe this. These drivers were making, on average, between $40,000 and $60,000 a year with over 6 weeks of vacation and personal time. They got their wives' and mothers' birthday off with pay, and if they worked one hour overtime, they got paid for two hours and if they worked four hours overtime, they got paid for eight hours, all at time and a half or double time.

So their contract expired and what did they do? They went on strike! I asked them why, thinking they wanted better medical benefits or disability insurance - since lugging kegs around was not an easy job on the body. Nope, they said they were not getting paid enough. So being the naive college graduate that I was at the time, I asked, "ARE YOU GUYS CRAZY?" Starting accountants were making about 25% of what they were making, MBAs about 30% and attorneys 35%.

So I asked them, Is there anywhere else you can go to earn the kind of money you are making? They all said no, but that was not the point. They said the Company, Pabst, had a lot of money and they simply wanted more of it. What choice did Pabst have? Were they going to deliver their own beer? They all laughed.

Well, Pabst did have one choice. They abandoned all their assets and simply left the city. They sold the local distributorship and some of the equipment and abandoned all the real estate to the City. And the beer truck drivers? They eventually worked for substantially lower salaries and benefits. They also said they didn't understand why Pabst walked out, because they would have negotiated some of their demands.

Fast forward 20 years to the spring of 2000, and I am trying to counsel a client who became an internet millionaire overnight. He was in his early thirties and had literally fallen into about $700 million of stock. I looked at the company and told him that he ought to sell his stock or at least protect it by purchasing a collar or some put options. After all, the company only had about a couple million dollars of revenue. He said it was too expensive, and besides, he wanted to "get to a billion" and everyone wants this stock.

He had the same response at $500 million, $400 million, $300 million, $200 million, and he finally sold at $50 million. He cried poverty and said that he would have bought the collars, he just wanted to negotiate on the price.

Now Jerry arguably had some of the best M&A advisors in his camp. These guys really know their business. They have worked on the best and biggest deals. I am sure they gave him good advice. The question is, did he take it? No, Microsoft had a lot of money, and Jerry simply wanted more of it. What choice did Microsoft have anyway. Were they going to "drive their own beer trucks" to fight Google? And now, he too does not know why they walked.

In the end, Jerry did no better than a group of beer truck drivers and an inexperienced internet guy caught up in the investment hype of the century. He failed to realize when he had a good deal and when he should stop negotiating.

There is a big difference though. The decisions by the beer truck drivers and the internet millionaire only hurt themselves. Jerry's decisions hurt a lot of people who trusted him to make the best decision for all the stockholders, not the best decision for himself or the board of directors or management.

Disclosure: No position.

Comments

[User 189771]

all the beer u can drink!!! u lucky sob...

[User 189781]

Jerry Yang did the right thing. I guarantee Microsoft will come back for the deal. You want to compete with #1 (Google), you better have good arsenal. I don't see anything out there besides Yahoo that can complement with Microsoft's power to be the new #1.

[mysaug]

great article. MSFT is not coming back to the table unless Yang bows his head and accepts 31 and retires after merger . He would need to go to enable a new MSFT/YHOO culture at the new company.

[blah-blah]

This was probably the best article I've ever read on here.

Thanks!

[Karol]

I like the way you think, I don't own MSFT or Yahoo...but I watch them as an indicator for a sector that could be explosive but hasn't since 2000...in my opinion. I was the lead negotiator for a very large aerospace company for the last 20 years of my 40 year career. My biggest problem with my analysts and negotiators was "drinking their own bath water"...they believed their own numbers so much, they forgot to "compromise" and reach a settlement. Thank you, good article.

[Welebrity]

Excellent points/examples. The art of negotiation is dead. Greed is the norm now. 51/49 does not work. 80/20 is on the mind of every negotiator, but you gotta know when to give a little. Savvy or smart he is not. A stalemate is sometimes a loss, not just the next step in the process. Is this a classic culture clash?

[Texrat]

Great article. Very captivating. And User 189781 is nuts.

[John from California]

Again, great article.It really brings home the point clearly. Liked your other article too, keep writing.

[jhcmal]

Well, the result is against most people’s expectation. But rethink about the different corporate cultures the two companies have, it is not hard to realize this possible outcome. Sounds a hindsight? Yes, it is.

Ballmer ’s hardball playing at the beginning and “microsofteded ”his stance to sweeten the deal to $33 later and finally gave all up, all proved that Ballmer was not a good dealmaker or negotiator and might have taken a myopic view.

Was it due to his personality or due to culture issue? Maybe both. MSFT shareholders may take a deep relief for the short while YHOO’s may take a hit. But Keep in mind, the market is to reflect a company’s long term value instead of the short eventually.

Ballmer said MSFT can go forward without YHOO. Hope he is right or he may have made a big strategic mistake by walking away as time waits for no one.

[chush.net]

Bad analogy. False analogy, in fact. I am not saying that Yahoo is worth more than $33/share although, Balmer was eager to pay $40/share a year ago. But the analogy is bad because unlike beer truck drivers who were only getting older, fatter, and probably lazier, Jerry has spent last few months on recovering Yahoo from Semel's management, acquiring and developing a lot of new technology and products. Also unlike dot-com stocks that had nothing in them but speculative valuation, Yahoo has all these new products and technologies that they can monetize, which the street frowns upon, and they also had a lot of negative publicity which undercuts the speculative value of their stock.

[John from California]

Balmer was willing to pay $40 a year ago? and my house was worth a million dollars a year ago too. Things change. Beer truck drivers lazy? What a comment.

And Jerry is cleaning up after Semel, sure after he hired him and paid him hundreds of millions? He is a good judge of talent then Huh?

[Homer]

great article. many other authors are clearly biased almost with an agenda.

[jayme]

awesome article man.
probably one of the best so far.
congrats =]

[babyfacemagee]

Great article. Good insight, examples. Just the right length and you made a great point. Bird in the hand...
Makes some of the other crap on this site worth putting up with.

[kmanm]

I honestly think Yang overplayed his weak cards. I am sure they could have closed this deal at 35/36 if they were willing to sit down and talk with MSFT. Remember, MSFT needs Yahoo more than Yahoo needs MSFT.

Right now I am sure MSFT is waiting for Yahoo stock to drop to low 20s or teens and Yang to get fired before attempting another push to buy yahoo again. I am sure they think they can eventually close this deal at 33.

Yes, Yang blew this deal but the fact is that he may look genius if Yahoo's stock jumps to low to mid 30s in the next year or so. If this happens, watch for Ballmer to get fired for not closing the deal.

[user 007]

Not really right. Jerry Yang is a talented person and he created Yahoo! Yahoo is a good company with good products, just that it has a very strong competitor - Google.
But, they do have one thing in common - Greedy. Too bad, $33/$34 is a good exit point; he is still a billionaire. Also, he never needs to drive a beer truck no matter if MSFT buys Yahoo or not.

[GyZmOjO]

game theory at work...

[Arif Kachalia]

Excellent article and to the dot. Jerry does seem out of touch and too much in love with his own assets and has overestimated its price.

[Dipak]

Tim Sweeny ...your last name is appropiate. Rymes with Swindle.
Jerry is selfless and has a good product.
Not to be arrogant he must have said ...not the right price.
He never wanted to sell.
If bought by Microsoft it would have been reduced to ashes...Jerry's vision lost.

[knucklehead]

great article! i know all too well about not spending the money collaring my stock gains during the dot-com era. i wanted more (also because i was wary of the tax bite). i lost 7 figures waiting until it was too late.

[WAKEUP]

Jerry Yang hates Steve Ballmer. That supercedes all else.

[kevin p]

Great analogy! I liked the way you broke it down to something everyone can relate to.

[kurt walter]

Jerry Yang did a fantastic job starting Yahoo from scratch. But he is proving that a Yang at the helm of a mature Yahoo is not good. ... As a MSFT shareholder I don't want Yahoo. I just hope this deal is dead.

[buyforeclosures]

All of you idiots bagging on Mr. Sweeney. Have you checked the BIO? I think this guy is successful for a reason and all of you rookie and wannabe traders ( beer truck drivers?) may just want to listen to what the man has to say. I bought Yahoo on spec sure....and at 27.80 I am pretty much screwed...should have bought visa at 63.00 where it was at the time I bought Yhoo..DUMB. Buit it is what it is and Tim is right on Target whether you like it or not