Google Benefits as Microsoft and Yahoo Fail to Unite
Shares of Yahoo (NASDAQ: YHOO) closed down 15% at just above $24, after Microsoft (NASDAQ: MSFT) withdrew its takeover offer. The wisdom of the crowd, as expressed in venture capitalist and blogger Fred Wilson’s pre-market online poll suggested a close of $22. Microsoft closed about unchanged, reflecting the view reported by the Wall Street Journal’s Marketbeat blog that the collapse of the deal was even worse for Yahoo than Microsoft. Still, Yahoo is up around 25% from when the first offer was made, while Microsoft is down slightly and Google (NASDAQ: GOOG) is laughing all the way to the bank. The question now is whether Yahoo can retain that gain.
Paul Kedrosky covers most of the bases in analyzing the situation at Infectious Greed. His bottom line:
This has a been a risky and poorly managed affair from end-to-end. Both CEOs deserve immense blame — Ballmer for vacillating; Yang for running a public company without the foremost regard for shareholders — and they are likely to be the two people who suffer the most indignities (including possible termination) over the coming weeks and months.
The reported confusion over exactly what Microsoft’s offer was, led Henry Blodget at Silicon Alley Insider to conclude that reviving a deal is less likely:
First, Microsoft walked away in part because of price and in part because Steve Ballmer lost his enthusiasm for the deal. In our opinion, this makes a future deal less likely (especially over $33). Second, Yahoo misjudged Steve Ballmer’s commitment to the transaction and, as a result, blew it.
For his part, Yahoo CEO Jerry Yang took to the blogwaves to rally the troops:
We’ve emerged a stronger, more focused company with an even greater sense of purpose. I’m so proud of how this company has come together, put the noise aside, and showed the world that we have the resolve and determination to thrive in challenging times.
This led hedge fund manager and blogger Howard Lindzon to beg him to stop.
I want to own stocks going up, not hear from CEO’s passing up gigantour increases to shareholder value without a real plan to get me the same place.
Paid Content’s Rafat Ali handicaps the alternatives for Microsoft, including AOL and Facebook. He also notes that a deal could have been done at $34 rather than $33. Bill Miller of Legg Mason, Yahoo’s second largest shareholder, told the New York Times a deal could have been done at a slightly higher price. As for Yahoo’s options now, he does not favor a linkup with AOL.
“A deal with AOL — that, to me, is not optimal,” he said. “If it was optimal, they should have done it before Microsoft came after them.”
Citigroup Internet Analyst Mark Mahaney says an eventual combination with Microsoft is still 15% likely, according TechCrunch’s Michael Arrington. Microsoft may come back to the table, Mahaney says, because “there is No Plan B to succeed on the Internet.” Arrington agrees, while Kedrosky thinks a deal would only happen if one or both CEOs leaves.
Mahaney sees Yahoo’s stock going to $22 if they continue with “business as usual” and don’t find a partner. This is 45% likely, he says, according to Arrington.
He gives a 40% chance that Yahoo pursues a major strategic alternative such as a Google outsourcing, partnership with AOL or MySpace, stock buyback, sale of Asian assets, etc. A Google outsourcing deal brings $1 billion of more in increased cash flow and adds $6 to Yahoo’s stock, he says.
Our colleague Barry Graubart at ContentMatters thinks “we’ll see Yahoo try to go it alone, at least for the time being. There were a few other potential suitors out there such as AOL and News Corp, but neither is in position to do the deal right now.”
I do
thinkhope that Yahoo will take some of the knowledge gained from this experience and change they way it does business
The immediate beneficiary of course, is Google (NASDAQ: GOOG). As the FT’s Lex says:
And the winner is … Google. The shadow cast by the internet search giant has formed the backdrop to Microsoft’s bid to take over Yahoo all along. It now appears to have also helped to stymie a deal.
Lex notes that Yahoo appears to be banking on outsourcing its paid search business in some way to Google as an alternative to an outright sale. “In theory, that would free Yahoo to focus on other businesses where it actually has a chance of competing successfully, while still reaping some cashflow from a search joint venture. If combined with an AOL merger, Sanford Bernstein reckons this arrangement could push Yahoo’s valuation to $37 per share.”
Even if cleverly structured, however, such a deal would, in substance, still involve some sort of agreement between the number one and number two search providers. It is hard to imagine antitrust regulators being comfortable with that.
On a lighter note, Kara Swisher translates Steve Ballmer’s break-up note to Jerry Yang, at All Things Digital, and Barry Ritholtz at The Big Picture brings our attention to the Fed’s Yahoo Lending Facility.
Finally, Charlie Rose’s interview of himself now sounds remarkably prescient.
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