Thursday, June 12, 2008

Microsoft's Final (?) Answer to Yahoo--No, Not Interested. Thanks!

So, it appears that Ballmer gave Yahoo a final answer and it is "NO, Not Interested. Thanks." The announcement was made by Yahoo (and not Microsoft):
The conclusion of discussions follows numerous meetings and conversations with Microsoft regarding a number of transaction alternatives, including a meeting between Yahoo! and Microsoft on June 8th in which Chairman Roy Bostock and other independent Board members from Yahoo! participated. At that meeting, Microsoft representatives stated unequivocally that Microsoft is not interested in pursuing an acquisition of all of Yahoo!, even at the price range it had previously suggested.
It appears that Microsoft realized that it was paying a premium for second-rate competencies that were further protected (diluted) by expensive poison pills. So, Microsoft wanted to cherry pick what it wanted most--Yahoo's search business but not all other unrelated weaker assets. That would have made Microsoft a winner in the deal. Yahoo rightly said No. So, the deal is off. The discussions are off. Yahoo loses in the short-term (shared dropped by 11%--so we know where the market sentiment is). Microsoft's shared were up about 4% (the market clearly happy that MSFT was not blindly and foolishly pursuing YHOO and overpaying for it!). --
So, what next for Yahoo. In the same press release, Yahoo said the following:
Yahoo! remains focused on maximizing value for stockholders by continuing to execute on its strategy of being the "starting point" for the most consumers on the Internet and a "must buy" for advertisers. The online advertising industry is projected to grow from $40 billion in 2007 to approximately $75 billion in 2010 and the company believes it has the right assets, strategic plan, Board of Directors and management team to capitalize on this growth opportunity.
As I parse this statement, what I see is (1) we (Yahoo) are in the right industry at the right time because the industry is poised for growth; and because we are in a growth industry, we will also grow--trust us! and (2) We (the current Board and management team) want to execute on the strategy for being the 'starting point' for consumers to search; and hence a 'must buy' for advertisers. Both these are not strategies but business directions and aspirations. Yahoo hopes and aspires that advertisers will consider Yahoo as a must buy and the consumers will continue to spend sufficient time on Yahoo properties.

Carl Icahn believes that the current management team has been soundly beaten by Google. And, Yahoo seems to be now wanting to enter into some business arrangement with Google (assuming that FTC will look the other way and that Microsoft will somehow keep quiet there).
As I blogged earlier, we know what Icahn wanted Yahoo to do. But, now Microsoft is not interested. My guess is that even he cannot persuade Ballmer to reconsider. They have been at it for a while and they have made their final decision. Now Yang & Co. have the clock ticking as we approach the upcoming annual shareholders meeting and proxy fight is looming. Carl Icahn's Yahoo shares are in the red as of today. We can bet that he is not a happy camper today.

If Icahn's slate of directors were to get elected, he needs a strategy different from 'Let's sell to Microsoft for a premium and go home.' His team will have to develop winning value propositions for consumers, advertisers and shareholders.

I say: Good Luck to Yahoo's current Board and Icahn's alternative Board.

Microsoft--while walking away from Yahoo--has kept its cash in the bank. But, it needs a compelling strategy for its future with its core business appearing to be weakened by lukewarm reception to Vista by enterprise customers.

Is Eric Schmidt having the final laugh (smirk, perhaps)?


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