Yahoo's 'Hanging Chad'

The final result stands but the credibility of Yang and Bostock weakened by the recount. Under ordinary circumstances, such error-corrections are footnotes and not news. But, Yahoo's Aug 1 meeting was supposed to be anything but ordinary. With Icahn and Yahoo settling beforehand, the meeting was supposed formality of re-electing the Board without much fanfare.
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So what happened after the recount? Yang got 65% instead of 85%. Bostock got 60% instead of 80%. While both got re-elected, they hardly got the mandate to lead Yahoo with strong support from the shareholders. What Yang and Bostock needed on August 1 was a mandate and endorsement from the shareholders to lead Yahoo in the coming months and years. The recount puts further pressure on Yahoo to come up with a credible strategic plan and execute it to unleash shareholder value--a tall challenge given the stock is hovering around $20.
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Time to focus on the future and regain shareholder credibility.

Yahoo's Much-Delayed 'Meeting' on August 1: Much Ado About Nothing or Articulating a Compelling Strategic Vision?

The much delayed meeting at Yahoo is tomorrow. Nothing newsworthy may come out tomorrow because most thorny issues have either been already settled or need to be settled after August 1.

Question 1. What role for Yang? Icahn has patched up and he along with two members are on Yahoo's Board now. Now, he is not an activist outsider. He needs to steer, lead and guide Yahoo to be a force in the online space. That will take time and patience. The unanswered question then is--Will Yang be forced out by the Board not simply because of Icahn but because the company may need new blood and new energy?

Question 2. How will the Google relationship evolve? As of now, that relationship is still in play. No negative information from the Government; So, I expect that to continue as both assess the business value (and risk) of the experiment while they wait for the Government verdict (or inaction).

Question 3. Does Microsoft have any serious part in Yahoo's strategy going forward? All indications are that the story is over. But, it is safe to say that a big chapter (and many be a big section) is over but the story may not be over. It is simply because any serious challenge to Google should involve Yahoo (which is still capitalized at around $28B). If the stock price falls much below today's price of about $20, all options and all price levels are in play.

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Tomorrow's meeting marks the beginning of Yahoo's next phase of evolution. While we may not see new news or theatrics (Carl Icahn will not even be present and T. Boone Pickens has sold his yahoo stake at a loss), we should watch for what Yang & Co. lay out as strategic directions and milestones. The market desperately is looking for some clarity now that the merger talks have ended. Will the expanded Board deliver on that expectation?

Icahn and Ballmer's Week-end Moves

In high stake coreporate games, the action does not stop for the week-end. The news over the week-end is that Microsoft and Icahn made a 'take-it or leave-it offer' set to expire within 24 hours. The idea was that Microsoft and Icahn will guarantee Yahoo about $2.3 Billion dollars in revenue, Microsoft will buy the advertising engine and Icahn will own the rest of Yahoo. The following from Yahoo's Press Release is worth highlighting.

Roy Bostock, Chairman of Yahoo! said, "This odd and opportunistic alliance of Microsoft and Carl Icahn has anything but the interests of Yahoo!'s stockholders in mind. Clearly, Microsoft, having failed to advance in search, is aligning with the short-term objectives of Mr. Icahn to coerce Yahoo! into selling its core strategic search assets on terms that are highly advantageous to Microsoft, but disadvantageous to Yahoo! stockholders. Yahoo's Board of Directors will not allow that to happen. Yahoo!'s Board remains open to any transaction that delivers full value to our stockholders - we just do not believe such a transaction should be dictated by Microsoft and a single short-term investor."

Mr. Bostock continued, "After negotiating among themselves without the involvement of Yahoo!, Carl Icahn and Microsoft presented us with a 'take it or leave it' proposal under which we would be required to restructure the Company, hand over to Microsoft Yahoo!'s valuable search business and to Carl Icahn the rest of the Company, giving us less than 24 hours to respond. It is ludicrous to think that our Board could accept such a proposal. While this type of erratic and unpredictable behavior is consistent with what we have come to expect from Microsoft, we will not be bludgeoned into a transaction that is not in the best interests of our stockholders."

Mr. Bostock also noted that Microsoft's position that it would not deal with, or otherwise engage with, Yahoo!'s management to reach agreement on this proposal or to implement it, is completely absurd and irresponsible given the complexity of the deal - one that requires the removal of half of Yahoo!'s business from Yahoo! and then the integration of it into Microsoft.

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The parameters of the 24-hour offer are totally puzzling to me. Why would the current Board that is being effectively ousted by this offer accept this offer under such tight time frame over a week-end? There are NO upsides for them to accept such a poorly crafted offer. It is not that Ballmer wants to keep Yang & Co. Carl Icahn had previously urged Yahoo not to break up the advertising engine and sell it, knowing that such a break-up will destroy Yahoo's value even further. And, Ballmer does not want to directly negotiate with Yahoo's current board but is joining with Icahn in pressuring the Board. Why give a 24-hour take-it or leave-it offer with no room for negotiations after wanting to negotiate to make this work before?

It's just one more stunt in the proxy battles.

Countdown to August 1 (Yahoo's D-Day): What's Microsoft Seeking Now?

We are on the homestretch towards Aug 1 shareholder meeting at Yahoo. Yahoo is fighting Carl Icahn and that seems to be intensifying on a daily basis. Now, WSJ has written a detailed article on the moves, counter-moves and gamesmanship in the Microsoft-Yahoo takeover saga. As I blogged earlier, Microsoft's interest in Yahoo is far from over. Why?
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Microsoft's obsession with Google is strong and deep. WSJ reports that:

Yahoo executives were unimpressed with Mr. Ballmer's vision. If anything, they regarded the Yahoo pursuit as a crude solution to quell his obsession with Google. They would later refer to Mr. Ballmer's plan as "filling his Internet hole." Indeed, Mr. Ballmer spent much of the meeting discussing the threat Google posed to the two companies.

So, the end game is not about walking away from Yahoo but also figuring out how Google may gain or lose with (or without) Yahoo.
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The interesting part of the WSJ article beyond illuminating some of the inner workings of the deal is about what Microsoft is pursuing now. Not happy to be a passive participant, Microsoft is pursuing to put together an ecosystem involving Time Warner, News Corp and others. It appears that Microsoft is not responding to overtures from others but is taking the role of the orchestrator of such an ecosystem. Why? Again, to ensure that if it cannot beat Google by acquiring Yahoo, it can at least create a credible alternative by pooling together online advertising strengths (and weaknesses) of second-tier competitors.
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Yahoo has about four weeks to show its shareholders that its current management team is capable to lead the company and has a credible and compelling vision. What Yang & Co. need is cold, hard facts (financial and operating numbers) that support the clear vision. What Microsoft is trying to do is to make sure that it scores a minor victory. Will that minor victory come at the expense of Yahoo's market value? Or will it be a central part of Yang and Decker's compelling vision? I doubt that July will be dull and boring--at least from Yahoo and Microsoft vantage points.

And the Rumor is: Microsoft and Yahoo are Back Talking!

I am not surprised because there is no reason to not think that Yahoo will still explore every option before the upcoming Annual Shareholders meeting. TechCrunch reports that the talks are back on but no clear details are forthcoming. So, what can we expect?

I do not see a full-fledged merger unless Microsoft can get Yahoo close to current price [without paying a premium anywhere close to what it offered in 2007 or even a few weeks back]. If Ballmer gets Yahoo at around $21, he will declare that it is a win for MSFT shareholders and reiterate that Yahoo fits in with Microsoft's long-term vision because it can help Microsoft achieve the requite scale quickly (and underplay any post-merger integration problems). I doubt that Microsoft will get such a bargain because that price is even lower than what Carl Icahn paid to accumulate his near 5% stake. He may not be willing to sell his stake for such a short-term loss unless he is prepared to accept MSFT shares under the belief that they are under-valued and may go back up at a faster rate!

If the discussions are about selling or combining on-line advertising business to create a separate entity with some sort of notional value, then Yang may be able to go in front of his shareholders and claim that he has salvaged a bad situation but without selling away the crown-jewels.
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This story is far from over. Microsoft said: 'No Comment." For Yahoo, I believe that every option is on the table till Aug 1.

Yang Needs More than Google to Pacify Shareholders on August 1

Yahoo announced late yesterday evening that it is entering into a non-exclusive relationship with Google. The title of the announcement itself is curiously strange:

Yahoo! to Strengthen Competitive Position in Online Advertising Through Non-Exclusive Agreement With Google

How does a company strengthen its competitive position by allying with its biggest, direct competitor? On the face of it, it fits with Yahoo's 'Open' strategy but this is not a long term solution. This is not enough to pacify the shareholders who feel let down by the missed opportunity to be acquired by Microsoft.

Both Google and Yahoo are cautious by saying that they will wait to see how the regulators react to this agreement:

Although Google and Yahoo! are not required to receive regulatory approval of the deal before implementing it, the companies have voluntarily agreed to delay implementation for up to three and a half months while the U.S. Department of Justice reviews the arrangement.

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So, who benefits from the deal? I think Google does for two important reasons.
1. Yahoo gives one more prominent site(s) for Google's AdSense. It's better to be placed alongside Yahoo's advertisements than be totally excluded from those sites.
2. Google and Yahoo "agreed to enable interoperability between their respective instant messaging services, bringing easier and broader communication to users." Google's IM client has not been a blockbuster success and Yahoo has a significant number of users and this combination helps Google.
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Yahoo claims that "this is an approximately $800 million annual revenue opportunity. In the first 12 months following implementation, Yahoo! expects the agreement to generate an estimated $250 million to $450 million in incremental operating cash flow." This is an estimate and we will see the results when we see the results!
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Yahoo has been exploring many 'strategic options' since Microsoft's public offer earlier this year. What they have come up with so far is a potential increase of $450 million operating cash flow by working with its most direct, dominant competitor. How will the shareholders react on August 1?

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's Overture to Facebook?

The news on the wires is that Zuckerberg refused to comment:"Asked specifically about the prospect of a sale, Zuckerberg declined to comment." No comment is news when there is so so much speculation about what Microsoft may do next. If Microsoft indeed enters into a 'transaction' with Yahoo, it may not need all of $40 plus Billions. So, given Steve Ballmer's need for ;building scale' quickly, it will not surprise me if Microsoft also explores either a 'transaction' with Facebook. For Microsoft to create a credible alternative to Google, it needs to shore up not only the advertising platform (Pandora from Yahoo helps here) but also recognize the emerging role of social networks (Facebook's Beacon platform helps here). Microsoft can then use these pieces to create a compelling and credible alternative and hope that the Street will give them a boost and not the boot.

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.

Yahoo's Q1 Results: Where's the New Value?

Those of us who waited anxiously to see if Yahoo would reveal extraordinary shifts in its performance trajectory, we must be disappointed for sure. As Reuters reported:

Despite beating expectations of earnings before special items, the results did not immediately convince the market that Microsoft's unsolicited $43 billion offer undervalues the beleaguered Internet company.

For several weeks, Yahoo has been claiming both directly (through Press Releases) and indirectly (pursuing possible corporate combinations with AOL or exploring business relationships with Google) that Microsoft's generous offer in the vicinity of $41 Billion is somehow low.
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Now that Google and Yahoo have both released their Q1 results, we know that there is no new information that alters the parameters of Microsoft's offer. If anything, I may be tempted to revise the offer downward due to the inordinate delay-tactics exhibited by Yahoo board. I am not sure what Microsoft may do short of taking the fight to the shareholders and gain control of the Board.

Yahoo's results today vindicate Microsoft's offer (very generous, as I said before!). It's time for both companies to put animosity behind and work towards creating a credible advertising platform to compete against Google. Even a delay of few months can prove costly for both companies.

Bebo for $850M: Reshaping the Social Networking Space

The news this morning is that AOL (Time Warner) has acquired Bebo for $850 Million. WSJ reported that:

The transaction is rooted in the belief that social networking is becoming a major gateway for how people use media and services on the Web, including email, search and video. "People are using social networks as their prism to the online world," said Bebo President Joanna Shields, a former Google Inc. executive who joined Bebo last year and is expected to remain at the helm.

AOL's business model is under transformation. Their revenue-mix is shifting away from subscriptions to advertising. This bet is a further signal that they have to have global scale to compete against first-tier companies.


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This announcement further means that Yahoo-AOL deal is unlikely. Rupert Murdoch appears to have walked away. Will Yahoo finally realize that it has few options left? When will the deal be consummated?

Facebook--How far can it go?

Here's an interesting video about why Mark Z. turned down the $1 Billion from Yahoo.

Microsoft-Yahoo Battle--It's all about the money!

Yahoo's counter offer of $40 is a smart move. Microsoft needs Yahoo. From Yahoo's perspective, this is the best of the strategic options available to them. They are simply trying to find an acceptable price.


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It will be interesting to watch how high will Ballmer go to get Yahoo?