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.

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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.

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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).
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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.

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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)?

We Know What Icahn Will do with Yahoo; But Do We Know What Jerry Yang Has in Mind for his Yahoo?

It's tough leading the company you start once it reaches a critical threshold as a public company. That's what Jerry Yang must be feeling in the weeks coming up to the Annual Meeting.
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First, there is public disclosure that he and his Board rejected a Microsoft offer of $40-a-share in 2007--which represented about 60% premium over the closing price when Ballmer made the offer. Terry Semel rejected it.
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Second, Yahoo rejected a $31-a-share in February. Apparently, Microsoft may have paid up to $34 late April but again, Yahoo leadership--this time, Jerry Yang--said No. The official Press Release at that time commented:

Jerry Yang, co-founder and chief executive officer, Yahoo! Inc. added, "I am incredibly proud of the way our team has come together over the last three months. This process has underscored our unique and valuable strategic position. With the distraction of Microsoft's unsolicited proposal now behind us, we will be able to focus all of our energies on executing the most important transition in our history so that we can maximize our potential to the benefit of our shareholders, employees, partners and users."

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Third, Carl Icahn starts acquiring Yahoo shares and there is proxy battle underway. Yahoo responds angrily to the first letter from Icahn. Then, he send further letters--all focused on getting Yahoo and Microsoft to enter into discussions of merger. Yahoo again responds angrily to Carl Icahn--essentially indicating that he has no vision for Yahoo. The following is from their June 6 statement:

Leaving aside Mr. Icahn's inaccurate interpretation of our retention plan, we again note that he has no credible plan to operate Yahoo!. We believe that Mr. Icahn's suggestion that we cancel our retention plan would have a destabilizing impact on Yahoo! and would clearly not be in the best interests of our shareholders. Furthermore, his suggestion that we put out a price publicly to see if Microsoft will alter its stated position is ill-advised. As we have stated numerous times publicly and privately, we are open to any transaction including a sale to Microsoft if it is in the best interests of shareholders.

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Carl Icahn's vision for Yahoo is clear: Yahoo has failed in its competitive quest against Google; Yahoo does not seem to have a credible vision to organically grow and innovate to be a leader and that it should sell itself to Microsoft. His vision is right from the point of view of shareholders who have seen their intrinsic value in Yahoo plummet. Semel rejected $40-a-share offer from Microsoft in Feb 2007 but Yahoo did not subsequently offer any new compelling vision or avenues for growth. Semel was ousted but the Board seems preoccupied with defending itself against takeovers rather than crafting a winning strategy on its own.

Indeed, my analysis of the initiatives pursued by them (a much publicized trial with Google and discussions with AOL, NewsCorp and others) leads me to conclude that they were looking at strategic linkages to have a credible basis to negotiate a higher price with Microsoft. Unless Yang & Co come up with a credible vision (supported by a workable execution plan), they have no basis to say that Carl Icahn has no 'credible plan to operate Yahoo.' Icahn may not have a plan to operate Yahoo--he never claimed that he has one. He is simply claiming that there is a better way to maximize shareholder value that what the current team is pursuing. He has even given a public figure for Microsoft to consider.

Instead of accusing Carl Icahn of not having a credible plan to operate Yahoo, Yang & Co. should lay out the vision and plans that the shareholders and employees can rally behind. If they do, they even Icahn may support the current management team.

It's time to go beyond letter and press releases; it's time for laying out compelling visions and detailing credible operating plans. Will Yang & Co. deliver that before the upcoming Annual Meeting? It's a do-or-die situation for sure--even for the ones that founded the company.

Microsoft-Yahoo: The Next Chapter

Over the week-end, a new chapter in the Microsoft-Yahoo combination began. Microsoft Corp. issued the following statement:

“In light of developments since the withdrawal of the Microsoft proposal to acquire Yahoo! Inc., Microsoft announced that it is continuing to explore and pursue its alternatives to improve and expand its online services and advertising business. Microsoft is considering and has raised with Yahoo! an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo! Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties.
“There of course can be no assurance that any transaction will result from these discussions.”

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I see it as Microsoft wanting its make and eating it too. It may have a chance to acquire Yahoo through Carl Icahn's proxy battle while seeking to create a friendly 'transaction' so that they can explore other options at the same time. Such a transaction clearly involves Yahoo's search-linked-advertising platform (Panama). It is brilliant because I am sure that Yahoo Board is now not interested to antagonize either Icahn or Ballmer by pursuing any discussions or explorations with Google. At minimum, this move forestalls Yahoo's any desire to examine links with Google or others. It also allows Yang, Icahn and Ballmer to discuss behind-the-scenes strategy for a possible corporate combination (read: acquisition) at a price that may be acceptable to all. If Ballmer gets Yahoo at the price that e offered ($34, I believe), he will declare victory. If Yahoo & Co. sell at $34, they can still declare victory since the official position seems to be that Ballmer never gave that offer formally in writing. At that price, Carl Icahn is a big winner (with may be $9/share gain in about a month or so--assuming that some deal will happen before the July Shareholders Meeting).
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Ballmer gets the options to still play with Yahoo till early July without much cost. And he may be able to use Carl Icahn to do the fighting while he has his managers work out ways to figure out the best way to combine the complementary capabilities of Microsoft and Yahoo to establish a dominant #2 position against Google.
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The story is far from being finished.

Carl Icahn and Yahoo: What's the Deal?

I had blogged earlier about Icahn's role in Motorola. he put pressure on Motorola's Board to make some governance changes. Nearly a week after Microsoft walked away from Yahoo, news emerges that Carl Icahn has amassed Yahoo shares to the tune of about $1 Billion. NY Times reported that:

Mr. Icahn has told associates that he bought as many as 50 million shares of Yahoo — worth more than $1 billion — in anticipation of pressing for seats on its board. He has also inquired at Microsoft, through various friends, whether he could help bring that company back to the negotiating table, these people said. He has received little encouragement, these people said, because Microsoft has insisted that it has “moved on.”

In the case of Motorola, Icahn has been a longstanding critic of the Board and the previous Chief Executive, Ed Zander. In Yahoo's case, it appears that he has not had much involvement or interest before. He is now likely to be a key player at least up until the upcoming Annual Shareholder Meeting on July 3--where most expect Yahoo shareholders to show their displeasure.

I do not think he will be able to get Microsoft to re-engage in the deal but I am sure that he will compel Yahoo Board to explore other strategic alternatives to boost the competitive position (and market value) of Yahoo. I only hope he does not force yahoo to make rash moves that destroys its long-term value while seeking to shore up the stock price in the short term. Yahoo's moves till July 3 will be closely watched and monitored by many shareholders including Carl Icahn. Yang needs to have a compelling story by July not just in terms of what it can do by itself but also announce a set of strategic initiatives with leading firms such as Google, AOL, MySpace and others to convince the shareholders that it has a comprehensive plan to accelerate revenue and profit growth. Otherwise, he will surely face angry rebellious shareholders. Icahn's move is just one more serious pressure on him and his Board.