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.