Microsoft Walks Away from the Yahoo Deal

Unless you were in a cave over the weekend, I’m sure you’ve seen that Microsoft has walked away from its 40B+ Yahoo acquisition attempt. I’ve largely avoided the topic, but do have some commentary now. Note that many people think this is just a posturing attempt by Microsoft and that’s entirely possible. First let me say that I think the merger would have been spectacularly bad for Microsoft. The cultural and integration issues alone would have been nearly unsurmountable. Would the mail portion of the deal even have gotten regulatory approval? How many high profile departure would you have seen? How many projects that really give Yahoo much of its street credibility would have been crushed? I’m not sure that Flickr, delicious, Zimbra and many others would have gone to Microsoft given the choice. That being said I think the deal would have been bad for Yahoo as well. Microsoft has had a terrible track record on the web and has multiple cash cows to protect. In the end the only way I saw the deal being feasible would be if Microsoft spun things out into a fully autonomous company. I didn’t see any indication that was going to happen.

On to Ballmer, I really think this underscores the fact that he needs to go if Microsoft is going to turn itself around. He seemed to have no coherent plan here. It almost seems if he woke up one day really wanted Yahoo and just didn’t think it through. Microsoft wants to compete with Google so bad they seem to be getting irrational. It’s clear they can’t do this organically, but I really don’t think Yahoo was the answer.

Next come the shareholders. There’s already a ton of speculation that this will result in shareholders lawsuits. To me that makes no sense for a couple reasons. First, as a shareholder it will distract the company and further drive down the price of the stock. The more tragic part though is the current state of the street. Everyone is so concerned with the next days closing price that very few people take the long view anymore. Unless you’re day trading, if you invest in a company you should be looking at the long term. That means trusting management. IMHO shareholder lawsuits should be reserved for gross negligence and other egregious acts. We remain far too litigious and it’s going to come back to haunt us. FWIW, the stock currently sits in the mid-24 range, which makes it down about 12%. That’s not nearly as bad as some people were speculating. MSFT is up mildly.

On to morale. Most people within Microsoft seem to be happy about the deal falling through. Many jobs have been saved and they get to keep their $43B cash horde. This happiness may wear off as soon as they realize they still are not effectively competing in the space, but with that much cash they should be able to figure something out. Things aren’t as clear at Yahoo. Yang and co are clearly happy, but the rest of the staff seems to have people on all sides of the equation. It will take Yahoo having a couple very good quarters or making a really compelling announcement for that to change if I had to guess. It’s been a long few months if you work at YHOO.

So were do things go from here? There has been talk of Yahoo grabbing AOL. I can’t see that making any sense, but let’s hope Yahoo doesn’t do it just to look like they’re making moves. MySpace seems a little more reasonable. I also see reports that Yahoo should buy back a bunch of stock. At first glance that makes a ton of sense, since the board clearly thinks the stock is way undervalued at the moment. With only $2.5B or so in cash though, they won’t be able to make a big enough dent to really make it worth while. The money could almost certainly be spent better elsewhere.

Some additional thoughts:
* This deal would have been really bad for Open Source. Zimbra is the first thing that comes to mind, but Yahoo does more in the Open Source space than they get credit for.
* It looks like Bill Miller and a couple other huge holders would have gotten behind a deal in the $35 range. If Microsoft really wanted the company, they almost surely could have had it.
* It will be interesting to see if Yahoo moves forward with the Google outsourcing, or if that will prove to simply have been posturing.
* Yahoo must have made it really clear that if Microsoft went hostile, that they would poison pill themselves to death. We don’t get too many of these in our industry and Yahoo is actually setup poorly to defend against a proxy fight, since everyone comes up for election at once.

Additional reading:
Kara
NYT
“The distraction of Microsoft’s unsolicited proposal now behind us”

I’m sure I’ll have more thoughts on this as it unfolds.

–jeremy

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2 Responses to Microsoft Walks Away from the Yahoo Deal

  1. jeremy says:

    Two notes:

    * The more I think about this, the more I think a shareholder lawsuit of some sort was almost inevitable from the beginning. If the deal had gone through at say $36 or so it would simply have been on the MSFT side instead of the YHOO side like it will likely be now.

    * I think the best quote I’ve seen so far goes to Bill Morrison, Think Equity: “In what may likely to go down as one of the more destructive decisions for shareholder value in the history of Internet stocks… To say we are disappointed is an understatement – dispirited is more like it.”
    On a list that includes Webvan. Pets.com, Kozmo.com, Flooz, eToys, etc. this shouldn’t even register a blip. It’s certainly possible that Yahoo will not deliver moving forward, but it’s certainly possible that they will. Let’s not be so quick to overreact here.

    Also interesting to note that while the NASDAQ is slightly down since my last post, YHOO is actually very slightly up (although still down almost 11% on the day).

    –jeremy

  2. jeremy says:

    The final numbers for the day:

    YHOO : 24.37 -4.30 (-15.00%)
    MSFT : 29.08 -0.16 (-0.55%)

    –jeremy

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