Microsoft Crosses a Line

Until today I’ve largely been a big supporter of Microsoft’s (MSFT) efforts to acquire Yahoo (YHOO). A couple of days before Microsoft placed its initial $44.6 billion bid for the company, I told Fox Business Channel that a Microsoft merger had to happen to save Yahoo (and I certainly wasn’t the first to say this, I just had magnificent timing).

Throughout the ups and downs and stupendous drama of the negotiations, I held firm that a deal was in the best interests of both companies. Not because I’m a huge Microsoft fan, but because the health of the Internet requires a competitive search market. Google controls too much market share and too much related search revenue. A counterbalancing force is needed to keep the system healthy. And Microsoft or Yahoo standing alone cannot counter Google.

But when Microsoft pulled its bid just as Yahoo was about to accept and replaced it with a search buyout deal that I described as equivalent to them trying to get the milk for free instead of buying the cow, I began to wonder if things were getting out of hand. Since then, Yahoo has quite literally prostrated themselves before Microsoft to get a merger done, even perhaps at a price much lower than Microsoft’s original bid. And Microsoft has largely toyed with them.

Yesterday’s shenanigans, however, clearly crossed a line. Microsoft and activist Yahoo shareholder Carl Icahn jointly announced that they’ve been talking, and that Microsoft may be willing to entertain a full buyout offer once again. But only on the condition that Yahoo’s board of directors is replaced: “We confirm, however, that after the shareholder election Microsoft would be interested in discussing with a new board a major transaction with Yahoo!, such as either a transaction to purchase the “Search” function with large financial guarantees or, in the alternative, purchasing the whole company.”

Icahn explained further, saying that Microsoft can’t be expected to let Yahoo stay in current management’s hands during the months-long closing period after a transaction is consummated. He added: “Jerry Yang and the current board of Yahoo! will not be able to “botch up” a negotiation with Microsoft again, simply because they will not have the opportunity.”

This is largely complete nonsense. During the transition period after a merger agreement Microsoft and Yahoo would be working closely and Yahoo would be unlikely to take any actions that jeopardize the deal. What’s far more likely is that Microsoft, led by CEO Steve Ballmer, have taken Yahoo’s rebuffs entirely too personally. It’s no longer just about business, it’s about destroying and humiliating the people who embarrassed Microsoft. And sadly, that has nothing to do with creating a balance of power in search.

Just as I criticized Yahoo for not quickly accepting Microsoft’s offer in early February before the mass executive exodus and destruction of shareholder value, I now point the finger at Microsoft. Yahoo is standing at the alter waiting for you to say “I do,” Microsoft. Time to put up or shut up.

I’m all for a merger. But I won’t stand by quietly while Microsoft destroys what’s left of Yahoo just because it can.

Original post

Comments

[LarryH]

As they say, "All is fair in love and war." MSFT and YHOO are certainly at war, and I agree with you; I am getting disgusted with the way MSFT is pursuing this. YHOO is totally inept, and MSFT is a bully.

[fabricator]

I disagree with the assessment. It's disingenuous at this point to tout Yahoo as "standing at the altar" (which I think is pure hyperbole) and castigate Microsoft for trying other tactics-- Yahoo spurned attempt after attempt by Microsoft, to its own detriment. Yang's stubbornness has cost the company dearly. I don't blame Microosft at all for wanting a clean slate with which to work-- the current board has proven itself inept at best and suicidal (in a corporate sense) at worst.

Too late to pity Yahoo IMO. They had their shot, and blew it.

[JeffP]

Are you for real? this is business, not grade school! Toughen up or get steamrolled. MSFT made a more than fair offer and got rejected and now they have a chance to get what they want at a far better price!? Now THAT's having the best interest of the shareholder in mind which is far more than anyone can say about Yahoo. MSFT is doing exactly what it should be doing and trying to maximize the value of the deal for their shareholder. If that means playing hardball, then so be it.

[MousePad]

Disagree,

We in the outside have no way to know the truth, but appear to me, Yahoo never wanted a deal of any sort. MSFT first offer $41 a share, they said NO, then $31 they said NO, then $33 they said No, then partial deal they said NO. No only that, they made a deal with google, that's stupidest thing in the world. And they generate an employee protection plan, which is no question they want stop any acquisition. You know why, because Jerry in control.

Can't understand why there are so many stupid people in this world.

[MuddlingInvestor]

"But I won’t stand by quietly while Microsoft destroys what’s left of Yahoo just because it can."
Looks like it was the original plan. Has nothing to do with search. MSFT and YHOO compete in Web portal business.

[User 86999]

Absolutely wrong!

Microsoft made an offer and yahoo started playing games by engaging with google and creating poison pill etc. You cannot expect a friendly behavior from others if you're acting hostile. I'm surprised that msft has been much less aggressive than they used to be. The following from msft sounds completely sane business.

"Despite working since January 31 of this year, as well as in the early part of last year, we have never been able to reach an agreement in a timely way on acceptable terms with the current management and Board of Directors at Yahoo!. We have concluded that we cannot reach an agreement with them."

[brianmckeown]

Apparently Yahoo didn't realize who they were toying with; their arrogance has cost their investors dearly (as well as Yahoo's board's reputation). Payback is hell.

[Bozzo]

Can you seriously blaim MSFT for not trusting $40Bln to people who have done everything in their power to sabotage the deal before?

[Slimsum]

Like someone said. Let Jerry yang go back to being the chief Yahoo and let someone in that wants to talk business instead of crying about everything.

[MarcelMcSweeney]

"This is largely complete nonsense." = Would not this be a contradiction to what Yahoo! has done in previous negotiations?

[EchelonDraft]

This is obfuscation on Ballmer's part to divert attention from bearing down on his own problems.

Question - when all is said and done, what is the foundation of Microsoft's success? It's control of the OS.

Given that, Vista should be (and is) representative of the best they can offer to their customers.

If I were Ballmer, I would do whatever necessary to keep investors from focusing on that. Ultimately that is a management issue.

If I were a Microsoft investor, I would certainly want to understand how they intend to improve the management of Yahoo when they can't even manage/protect their most valuable asset.

[Noway]

Mike is right. This collusion between Icahn and Ballhair is a ploy for MS to steal Y! Search for cheap and kill the rest of the co.
This isn't the right way to do things. MS will piss off the employees big time. You think the exodus now is bad, wait til you see when MS takes control.

[Noway]

Mike is right. This collusion between Icahn and Ballhair is a ploy for MS to steal Y! Search for cheap and kill the rest of the co.
This isn't the right way to do things. MS will piss off the employees big time. You think the exodus now is bad, wait til you see when MS takes control.

[Noway]

@echelon: Right on. 1) MS also can't run a profitable online business. 2) Can't even catch Y! in search 3) Have no clue how to brand their search/portal... Live, MSN, windows live, WTF, does anyone know what they are?

[jcrash]

Fool me once...

MSFT has no other choice at this point but to use a heavy hand, to do otherwise would be to risk real embarassment.

[StrictNon-Conformist]

user86999,
the change of control severance plan is NOT a poison pill to any would-be acquiring entity that actually wants the most valuable assets: the people and technology. It's also not uncommon to have similar things enacted for higher management: it's only unusual that it extends to everyone, down to the lowliest clerks/peons in the company. But if you want something intact and aren't intending on gutting it, it helps to assure those that desire to stay (for whatever reason) that at least if there is a major layoff, they will have something to live off while competing against all their former coworkers for a dearth of jobs with a sudden glut of people to compete against. In all reality, it's the people and their knowledge of the technology and their established teams that Microsoft values: without that, none of what you know as Yahoo! would have succeeded. Without the people who already know how to work together, all Yahoo! (or Microsoft, or Google) would be is a bunch of leased buildings and rapidly depreciating, horribly abused computer hardware.

If it were only about money to get things done by hiring people, Microsoft would already have managed to do it: the reality is if people don't work together properly, things aren't managed properly, and you can't get people to even interview because of who/what you are in the eyes of the potential employees, you'll never achieve the goal. You can't simply hire a bunch of software developers and point them at something and say "Go make us a bunch of money, and we'll pay you!" and have it be successful. After all, how many people do you think Microsoft has working on MSN and all other online properties? Now, how much have they made in terms of profit? (Answer: it'd only be impressive if negative numbers were considered profitable).

Both Yahoo! and Microsoft know that regardless of all other outward appearances, money isn't the solution: having the people Yahoo! has already is the solution, because they know what they're doing from a technical standpoint. Now, the management, well, it may be sinking towards the mess that defines Microsoft: if Microsoft could already manage their way to success, with their many times larger employee base, surely they would have done so by now, wouldn't they?

[bob1961]

I am a sales person, and by reading the stories and reading the tea leaves, it seems to me that Yahoo screwed up this transaction. The employee retention plan that Yahoo put in place about 6-12 months prior to the merger opportunity, had something to do with this. I can't see why Microsoft would want to pay for retaining people it has no use for.
If stories are correct, top people at Yahoo are leaving in droves now, as they know the ship is way off course. It's time to get very profitable for Yahoo (this won't happen) or sell. Yang is in a corner and can't get out!

[User 86999]

MSFT is seriously overestimating what they're buying. Y! finance cannot even add the numbers on the market summary. Try it on some heavy traffic days after markets close. They're off by millions of transactions and the related percentages come out in triple digits each! The charts make numerous errors, try their comparison charts and then compare with some other top level site. What msft is buying is the customer base, who would keep going back to y! And, that customer base may not actually be worth the expense ticket. That's what y! stockholders see, and that's why the stock jumps back up 20% over a few days whenever there is a chance that msft will buy it. If stockholders had enough trust in y! management the stock would move in the opposite direction, or at least stay neutral.

[usbworks]

Holy cow Michael, you're actually beginning to get it...

Can you say greenmail?

Look, if you are Icahn, would you try to elect a full slate of directors with a huge risk of failure and a total loss financially? Or would you take a guaranteed two or more seats on the board to harass Yahoo and Yang?

Now, if you are Yang, would you leave the fate of your company to a proxy battle that could leave you with a total loss of all of the seats? Or would you bribe Icahn with two or more seats to get past August 1st?

The way this ends is not with a bang but a whimper. Yang eventually pays Icahn for his small stake in Yahoo at $34 a share and says goodbye!

It's happened before and it will happen again. Just ask Carl.

[DanaTal1234]

My grandfather always says, WOW spelled backwards is WOW, and a dressed up turkey is still a turkey. MSFT needs new brain trusts! Ousting Yang is not a safe play to acquire a company that is totally intangible assets, aka human capital intensive. If they want to be successful in placing a thorn in the side of GOOG, they will need to work collarboratively and smartly. I'd bet that GOOG's power in the search paradigm continues, and that the collective internet development teams between both MSFT and YHOO don't have a complete deck between the two of them to do the job at hand. A MSFT/YHOO merger is a waste of a war chest and only stands to benefit one person, Icahn. The two companies would need to create a new method of search that will shift the convention of what everyone knows in order to ever gain a meaningful leg up on GOOG. MSFT would be better off buying the Bloomberg stake that Merrill Lynch is offering up and building up its financial software business, or the Time Warner Cable spin off and further building its at home entertainment opportunities. Imagine!

[marketwatchr]

This is business. Yang and Board had their chance at $31 & $33. MSFT has the right to do the best thing for MSFT shareholders, not Yahoo shareholders. $33 was not not enough. Yahoo is being mismanaged.

[fabricator]

usbworks has a point. It's all about power plays. Nothing new here, and I'm frankly surprised at some of the naivete in the article and comments.

[truthinvesting]

MSFT at these levels should be bought