Wednesday, February 13, 2008

Yahoo is toast

In the airport newsracks, Sunday’s Merc blared the headline

to reject

I was on my way out of town and didn’t get a chance to comment on the unfolding story of Yahoo rejecting Microsoft’s unsolicited $44b takeover offer. The rumor of Sunday morning became official Monday morning (and I still couldn't follow up).

The Yahoo board isn’t ruling out a deal, they just want more money. However, the stock has been bouncing between $29 and $30 since the deal was announced, suggesting that shareholders seem to think that the $31 offer is likely to go through.

What is Microsoft buying? Some technology and some operational systems, but mainly customers and engineers. (Some argue its executives are top notch, but to be it’s not $44b worth). Yahoo is strong in some point products (mail, IM, Flickr), and some aggregation customers at its portal, but otherwise its products have parity or disadvantages relative to the big G.

After glancing at this morning’s paper and then talking with Dean Takahashi of the Merc (who’s going to a new job), it’s pretty clear: now that it’s in play, Yahoo loses no matter what:
  • If Yahoo is taken over by Microsoft, key engineers are likely to bolt, exacerbating its current recruiting disadvantage vs. Google. Even customers are threatening to bolt, although it could be just posturing.
  • If the takeover and uncertainty drag out for month, headhunters are circling like sharks to pick off the best engineers. Customers will wonder if their favorite Yahoo solution will get orphaned in an acquisition.
  • If the deal fails, Yahoo will lose engineers who realize its core problems remain unsolved and customers who now are reminded that Yahoo is in trouble. It may continue to layoff key personnel or lose its key executives.
  • If Yahoo turns down the richest potential buyer (I’m nearly 100% sure that Google can’t legally make an offer), the next bailout will be at a lower price. There aren’t many companies who can (or even would) pay $33b (half cash) for Yahoo, so the shareholders will be pushing hard for immediately improvements.
Today’s news is Yahoo’s (thus far futile) search for a “White Knight” friendly buyer. Right now they are trying to convince News Corp. (Fox) to take a minority stake in Yahoo. The deal might include combining MySpace with the Yahoo portal. Since News Corp. doesn’t have a lot of cash, it would have to be some sort of equity deal. Rupert Murdoch is pretty savvy, so while Yahoo is relatively cheap, he would want some indication that the stock will go up.

The other idea is that Yahoo might buy AOL when AOL is spun off by Time Warner. This is a truly terrible idea. It combines two declining properties, adds all the uncertainty and disruption of combining two firms without much upside, and likely reduces Yahoo $2b cash horde. The only people who benefit are the Yahoo managers and directors who get to keep their jobs.

I predict at the end of 2008, Yahoo will no longer be an independent company. (I suppose being 20-30% owned by News Corp. would be a semi-independent company). If it drags out past the end of 2008, then I predict a weakened Yahoo will be acquired in 2009 for less than $44b.

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