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Microsoft to Rescue the Yahoo Damsel in Distress

Posted on Friday, Feb 1st 2008

Yahoo!’s vulnerable situation was bound to bring out acquisition offers, and Microsoft has been sniffing at the company for a year (see the letter from Ballmer to Yang in the WSJ). I was hoping against hope that Private Equity would step up to the plate, recognizing the leverage opportunity, but it has not happened.

Now, Microsoft’s rather sweet offer will have to be considered by the Yahoo! Board. The $44.6 billion offer represents a 62% premium above the closing price of Yahoo! common stock on Jan. 31, 2008. Yesterday’s closing price was $19.18. Microsoft’s offer is $31. Right now, the stock is trading at $27.80 amidst heavy trading volume of almost 290 Million shares having changed hands. Shareholders are breathing a sigh of relief.

Unless other comparable offers turn up, Yahoo! will have to sell itself to Microsoft. I am not optimistic that other offers will materialize, despite rampant speculation about who else may be in a position to bid. And I don’t believe Private Equity players would match Microsoft’s offer.

So, for all practical purposes, we have to prepare for a time when Yahoo! will be sitting inside Microsoft. It is the sad end of an era, for sure. It is also a sad ending for a company of Yahoo!’s stature.

On the positive side, the Microsoft-Yahoo! combo could be a good force against Google’s domination if the DNA mismatch can be handled. I have some skepticism on this, because Microsoft’s geeky DNA is not what Yahoo! needs to clean itself up. As I have said like a broken record, Yahoo!’s opportunity is one of verticalization. Somehow, I have my doubts about how Microsoft will play its Yahoo! hand, once they manage to get a hold of it.

Anyway, I have to say, I feel sad for Yahoo!

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You called this one right.

As per your comment Wednesday, the worst possible outcome for the Yahoo brand is at hand. Microsoft could use a friendlier brand, but I agree that I don’t see Microsoft managing Yahoo any better than current management. Knowing them, they will likely squander any good will that has been built up with the Yahoo brand over the years.

Microsoft has not shown the ability to turn around under-performing businesses, apart from businesses built on Office-Windows.

Apart from the online advertising consolidation that Microsoft is after, most other properties will be left to linger and wither or may be combined with other MSN properties.

Yahoo has much potential as you’ve said. But in this climate I didn’t see Private Equity as a strong option.

After this offer, do you think the board could finally wake up from its’ slumber and look for better management to right this ship?

The internet community would be better off with a stronger independent Yahoo still around.

Realtosh Friday, February 1, 2008 at 1:24 PM PT

Unfortunately, the Board has little choice at this point but to consider the offer.

If they decline the offer, they would be swimming in shareholder lawsuits, unless something better comes along.

I’m not sure if the shareholders would allow yet another management change experiment.

Sramana Mitra Friday, February 1, 2008 at 1:28 PM PT

Its really sad for Yahoo! They lost their way badly.

Rajiv Friday, February 1, 2008 at 3:04 PM PT

Yahoo! problem is not about money. Yahoo! just have to find the way. That’s not impossible :-)… may be easy;-)… the secret words is “Disruptive Innovation”

Carlos Lagemann Friday, February 1, 2008 at 6:34 PM PT

You’ve said previously that you would not like Microsoft or News Corp to take control of Yahoo.

It has been said that Yang is not Microsoft’s biggest fan, and that he may be looking for a white knight. Since you wouldn’t like Murdock either, what about Apple? Would you feel better about Yahoo’s prospects in the Apple umbrella?

You’ve also said that Apple should focus on execution rather than innovation since they’ve got so much on the plate. You’ve also said that Dell would be a good hardware acquisition for Apple.

What do you think about Apple acquiring Yahoo? Would there be any synergy for the two companies?

Apple has for mostly stayed out of the internet services/ online community market that has been the main focus of Yahoo. Apple has concentrated in monetizing their online initiatives, eg Apple Store and iTunes.

Could Apple be the one to help Yahoo monetize their community? Or could AppleYahoo be nearly as bad as the MicrosoftYahoo fiasco is expected to be?

Realtosh Saturday, February 2, 2008 at 8:52 PM PT

I don’t think Apple would buy Yahoo. It defocuses them from their core 3 businesses, and I don’t see why they should allow that to happen right now.

Sramana Mitra Sunday, February 3, 2008 at 12:07 PM PT

Sramana,

I know you’ve talked about it(‘the fight’), and I’ve jotted down my own art-of-war for Yahoo!, but it could just as well be their epitaph.

http://weareindia.blogspot.com/2008/02/api-arrogant-pricks-inc.html

preetam mukherjee Tuesday, February 5, 2008 at 9:26 AM PT

I agree. Apple has enough on their plate right now. A Yahoo acquisition would defocus them from their 3 businesses.

But from the perspective of Yahoo, would Apple have been a good white knight for Yahoo, if Yang and Jobs were so inclined? Better than Microsoft? Google obviously feels that they would be unable to bid for antitrust reasons. But also, would Google do better than Microsoft in realizing Yahoo’s potential?

I know you prefer an independent Yahoo. But if Yahoo is forced into a deal (and it looks like the Microsoft offer is doing just that), is there anyone better than Microsoft for Yahoo? (I’m not saying that anyone else would even try to outbid Microsoft — I’m asking from a Yahoo board strategy kind of conversation.)

I’m convinced that the Microsoft Yahoo deal will go through.

But are there any options for Yahoo? And who would create the most value out of Yahoo?

Realtosh Tuesday, February 5, 2008 at 11:47 AM PT

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