Microsoft Pulls Yahoo Offer
Microsoft got fed up with Yahoo’s dithering. Yahoo will face tremendous shareholder upheaval for screwing this up.
And I don’t think this farce is quite over yet! After this, the Yahoo stock drops. Jerry Yang gets fired as CEO. Microsoft comes back into the game, and buys Yahoo for a lot less. That’s certainly one scenario.
I tend to agree with your assessment.
Although, one would like to get smug with you, since you didn’t allow any possibility that the merger wouldn’t happen. But in fact, your assessment makes the most sense, so I’ll pass on jumping for joy just yet.
My first thought when I first read the news of Microsoft’s withdrawal, was that Yahoo stock will drop into the toilet on Monday. My second thought was that if Microsoft does in fact give up their intention to ever take out Yahoo, Yahoo may get a chance to build out their verticals. My gut tells me otherwise, but one can hope.
My second thought is I wonder what SM thinks, and popped right over to your site.
My gut instinct agrees with your read. I say Microsoft comes back for a second bite at half the price.
Microsoft may very well know internally all along that buying Yahoo is a waste of money - possibly a defensive move to take out a potential competitor, or just to pick up some engineering talent and customers. In that case, Yahoo is a bit pricy So, if Microsoft went ahead with a hostile takeover, it may not be contributory to earnings. The suitors’ internal projections may not expect much of a contribution from Yahoo, even as they make claims to the contrary.
So, in the alternative if Microsoft goes ahead with the merger in a hostile manner or by negotiating with the board, the result is a very high purchase cost. Amortizing the cost of acquisition could swallow future Microsoft earnings for several years. Ironically, the merger could be such a drain on earnings, that in a couple of years it would be Balmer’s job on the chopping block. It would prove to be quite embarrassing for Microsoft to lose a large number of Yahoo engineers and customers to Google and others, after spending so much on a Yahoo acquisition.
Plus, Microsoft can’t afford to lose focus at this moment in time when its’ core businesses are under assault. There’s a small piece of me that hopes that Microsoft is starting to realize that their core businesses are vulnerable. Hubris will likely stand in the way.
Apple is getting 50% yoy growth in their Mac business, directly at the expense of Windows licenses. Apple is also fashioning the iPhone into the best thing since sliced bread. Microsoft knows how hard they tried to break into the mobile phone business. They lost a lot of money for more than 10 years trying to build their mobile business. Then, Apple surpasses their handset volume, in less than a year on the market. The iPhone business is profitable out of the starting gate, and is heading straight up. In contrast to the iPod’s success, most Zunes that have sold, have been sold at deep discount to clear inventory. IBM and others are trying to make their software stacks platform agnostic, in part so that they are not beholden to Microsoft. Major PC makers including Dell are begging for Mac licenses. Their Windows product has not quite measured up; particularly Vista has been disappointing.
Microsoft is getting hit from all sides from the likes of Apple, Google, IBM and many others. Microsoft may have wisely figured out that they to focus on their core businesses right now.
They do need to transition their business to the Internet, and Yahoo would actually be quite helpful in helping them to that goal. However, the distraction of trying to meld such disparate cultures as those of Microsoft and Yahoo at this time, could result in Microsoft taking its’ figurative eye off the ball; long enough to result in a loss of one or more monopoly businesses. That would mean the loss of windfall profits, as competition would be a drag on profitability.
Microsoft has proven unable to create new businesses not dependent on one or more monopolies lately. X-box being the exception; is widely believed to be an unprofitable business. The consoles are loss leaders, replacing faulty units cost billions, and unit sales are decreasing while PlayStation and Wii sales are growing.
I wouldn’t count Microsoft out. They still rake in more earnings than any other tech company by a wide margin. Selling millions of copies of the same software tends to bring very high profit margins.
Since Microsoft can’t figure out how to make good use of their cash, blowing it on acquisitions like Yahoo may be as good or better than dividends. Anything seems to be better than Microsoft burning through their cash trying to build businesses in vain. Maybe one of these long-shot purchases may bring Microsoft the kind of innovation, that they have been unable to build internally.
The only problem with a hail mary, like acquiring Yahoo, is Microsoft itself. The folks in Redmond are not lacking for resources or talent. Bringing in more talent wouldn’t necessarily change the dynamics involved. Microsoft is structured to protect its’ monopoly businesses and try to extend them into related businesses. This rigid, inflexible nature makes it impossible for Microsoft to create successful new businesses that may threaten their established ones.
Now, Microsoft needs to decide whether the benefits that Yahoo brings to Microsoft are sufficient to make up for the huge distraction that the whole affair will prove to be. Either way, Microsoft can afford to wait. Next time around, Yahoo will likely be worth just a fraction of today’s inflated value due being an acquisition target.
Yahoo has a reprieve. May they use their time wisely to build their businesses, instill some structure, and build their verticals into profit powerhouses. They must build revenue, and earnings. The only way to get that share price up will be to have some successes.
I am afraid that Microsoft would likely dismantle most Yahoo businesses. Microsoft would try to move as many Yahoo customers and engineers over to Microsoft technologies.
Microsoft may be making one of their infamous turning on a dime. After trying to discount the value of the Internet for years, Microsoft turned quickly and built Spyglass into Internet Explorer, and then tried to build the Internet into a proprietary extension of Windows with proprietary IE extensions. Now, as that seems not to be enough, Microsoft is trying to build an Internet business to rival Google’s . Microsoft may not desire to build the successor to Windows and Office. Certainly, Google is on that path. And Google won’t build a solution that requires Windows. In fact, Google’s software will likely make Windows optional. Microsoft needs to build the business that will obsolete the cash cows, or someone else will do it for them.
With or without Yahoo? is the question.
There were a lot of big investors who had shares of both MS and Yahoo making some aspects of the deal difficult.
source: http://seekingalpha.com/article/65131-yahoo-s-top-investors-don-t-want-microsoft-to-raise-bid
Going by this, I dont think there will be any major shareholder upheavals. Usually the upheavals are started by big players before spreading to small players.
I think the next logical step at Yahoo is Jerry Yang’s dismissal. The Board needs to send a clear signal to the shareholders that something intelligent is being done, not just this random stubbornness that Yang just displayed (with the Board’s approval).
I would like to see how Yahoo pulls its share price up from the $22-$24 range to $37.
Also, for the record, I still believe Yahoo’s turnaround strategy is this:
http://sramanamitra.com/blog/484
Jerry Yang doesn’t, and I frankly have no confidence on the guy’s leadership or strategy skills (or negotiation skills, for that matter).