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| Microsoft Withdraws Bid for Yahoo!: The Mating Dance Will Continue by Karsten Weide, IDC On May 3, Microsoft's Steve Ballmer announced in an email to Jerry Yang that Microsoft withdraws its bid to acquire Yahoo!. The following Monday, Yahoo!'s stock price declined by roughly 15%. Let us take a look at what this means, what the players' options are and what we expect will happen next. First, Microsoft. It did indeed walk away from its bid, so the deal is off — for now. Microsoft walked away, but where are they going to go? By bidding for Yahoo!, they already conceded that they cannot beat Internet advertising market leader Google on their own. Microsoft itself cannot possibly grow fast enough, and that means it must buy advertising revenue, and the only company that would provide enough to make a difference is Yahoo!. Microsoft may have dropped its bid, but it needs Yahoo!, and it still wants Yahoo!. What really has happened is that Microsoft has called Yahoo!'s bluff. Steve Ballmer might as well have said, "So Jerry, do you and the board really think you can survive the ire of stockholders who you just made lose $6 billion dollars?" And he would have a point: Even major shareholders had said that at $34 per share, they felt the deal should go through. At $33, Microsoft's new offer wasn't far off, but Yahoo! wasn't going to budge below $37. For now, Microsoft will just sit back and sing the tune "Time is on my side". The company will let stockholders do the work for it. Microsoft may decide to quietly buy Yahoo! stock now that it's a lot cheaper than its latest offer of $33. If Yahoo!'s stock price dipped below the low of $19 it had had before Microsoft launched its bid, it may consider renewing its bid, of course with a much lower offer. Next, Yahoo!. Most of Yahoo!'s executives probably partied on Saturday. They wanted to kill this deal by almost any means necessary. Many did not want to work for Microsoft for cultural reasons, and few of them had any interest to cede control to Microsoft. And Jerry Yang, well, he said in a post on Yahoo!'s corporate blog Yodel Anecdotal that "no one is celebrating about the outcome of these past three months" – but my hunch is, they were. Yahoo! is Yang's baby, and of course he didn't want to lose it to Microsoft. But Jerry Yang is not just an executive, he is also a member of Yahoo!'s board of directors, and for them, the story is a different one. They are legally required to maximize shareholder value. Yet they just presided over destroying about $6 billion of shareholder value. They may have thought they could coax more out of Microsoft, know better now and are currently feeling the pain from the fall of the share price. That said, they believe they have a strategy for Yahoo! that will ultimately provide more shareholder value than Microsoft's offer did. However, it is neither Yahoo!'s executives nor its directors that ultimately decide whether Yahoo! will eventually be sold to Microsoft – it is Yahoo!'s stockholders. And many of them will be disappointed, to put it mildly, about losing a serious amount of money. They would rather have had Microsoft's money in the hand now than a potential increase in stock price in 2009 or 2010. Stockholders will exert an increasing amount of pressure on Yahoo!'s board to come back to the negotiating table with a more reasonable offer. Almost certainly, others will file lawsuits against Yahoo!. Some may even consider to nominate a different slate of directors for Yahoo!'s board for the upcoming annual stockholder meeting. For Yahoo!, the race is on to convince stockholders that its strategy will indeed provide them with more value mid to long term than Microsoft's offer did before their time runs out. Yahoo!'s strategy as outlined by Yang is, one, to become the starting point for more Internet users, two, to become a must-buy for advertisers, and three, to open up Yahoo!. Despite Yahoo!'s enormous user base, the first part of that strategy is getting harder and harder for Yahoo! to control and move forward. The second part is a given for a media company: You want to understand your audience, you want to understand your advertisers, and give both of them what they want. However, as far as the third part of this strategy is concerned, Yahoo! has indeed launched some promising strategic initiatives (in particular Yahoo!'s Open Strategy). But many shareholders may not believe in this strategy, in particular because Yahoo!'s revenue growth has yet to improve after almost a year under the reign of Yang. While many may believe in the strategy, they likely lack the patience. Even if it works, it would take at least two years to move the needle. Unfortunately for Yahoo!, U.S. financial markets are a culture of near-instant gratification. Are there other options? Outsourcing search and search advertising to Google does not make business sense. Search will not be the leading and dominant segment of Internet advertising forever, but it will certainly be that for the next five years. Outsourcing search to the main competitor concedes defeat and will not provide as much shareholder value as the Microsoft offer did. (Not to mention likely regulatory issues.) Acquiring AOL is also not an option because for now, it is troubled, and it is unclear how folding it into Yahoo!, even with additional investment by AOL owner Time-Warner, would help. So the likely outcome is that stockholders will eventually force the board to re-open negotiations, possibly even before the annual meeting takes place – only that Yahoo!'s bargaining power will have been greatly diminished. Microsoft will first sulk, but eventually grudgingly agree to talks. The eventual deal will perhaps not go beyond the $33 per share offered by Microsoft, and may conceivably even be below that. In the meantime, while Microsoft and Yahoo! are busy with each other, Google has a free run and will enjoy it. write your comments about the article :: © 2008 Computing News :: home page |