Microsoft And Yahoo! It’s Coming Down To Price

April 8, 2008

Yahoo! sent a letter to Microsoft in response to Microsoft’s and said they weren’t opposed to a merger, but felt the offer undervalued Yahoo!.

In otherwords – after initial talk that Yahoo! wanted to remain independent and wasn’t up for sale – it’s now come down to price.

I still feel Microsoft has the upper hand, and Yahoo! will soon cave. They may be able to squeeze a few more dollars per share out of the deal, but there are some market pressures pointing in the opposite direction.

Yahoo! hasn’t really provided any new direction or justification on why they should remain independent. Their recent “three-year financial plan” seemed like more of the same meandering that has plagued the company for years:

Contrary to Yahoo’s assertion that it had received “positive feedback” from shareholders about its three-year financial plan, moreover, investors and analysts are increasingly ridiculing this, too. In an email exchange with SAI, one analyst described the plan as “a joke” and said he had heard no investor say positive things about it.

The history of other unsolicited corporate takeovers doesn’t bode well for Yahoo!, either. As I mentioned earlier, it’s worth revisiting Oracle’s swallowing up of PeopleSoft: Marketwatch has a good overview, which was as nasty they come. After a long, drawn-out battle where PeopleSoft executives were outsted, Oracle prevailed. Taken in conjunction with Oracle’s takeover of SAP, neither example bodes well for Yahoo!:

[Oracle's] track record has suggested that companies with deep pockets and resolve eventually get what they want regardless of the preferences of their adversaries.

To justify Microsoft’s offer of $31 a share (and possibly squeeze out something higher) Yahoo! absolutely must announce positive Q1 earnings. My gut feeling is they will be weak. Therefore, it’s in their best interest to bite the bullet and capitulate to Microsoft before earnings or immediately after. Otherwise, there will be no stopping the stock from sinking abruptly, which means Microsoft can lower their bid, and shareholders can pressure Yahoo! to sell the company before the stock falls further.

What I personally find completely disheartining is the drifting, nearly lackadaisical nature in which Yahoo! management has approached the entire takeover situation – a lot of meetings, talk, and letters – but no results. To keep the company independent requires some bold moves (say firing Yang and reinstating some turnaround visionary [Koogle?], slashing staff brutally to cut costs, or announcing a merger / ad partnership with a Microsoft rival [*Google*] – ASAP). The management’s failings, in ample evidence over the last few months, is exactly what landed them in this situation to begin with, and sadly, gives me less reason to believe they are the right people to run Yahoo!.

Additional Reading: Seeking Alpha: Yahoo’s Jerry Yang Needs To Get On With It