HooYa! A Devil’s Deal Sent from Heaven

Tuesday, February 5, 2008
Posted by Jim Hedger @ 1:56 pm

In the autumn of 2005, Bill Gates was asked if Microsoft would do to Google what it did to Netscape. “No”, replied Gates, We’ll do something different.”

- source: NYTimes.

Frustration Friday
On Friday, I was stuck in an airport waiting for the eastern seaboard to clear enough to allow the plane I was coming back west on to land. The WiFi was down or at least it was so over-used by thousands of others nearby it was virtually useless. Having headed east for a funeral, I didn’t think I would be spending much time working. Imagine how freaked out I was on Friday to be snow-stuck in Toronto waiting through delays, cancellations and re-bookings. The second biggest potential deal in tech history had made its way into the open and there was precious little I could do to research or cover it. All I could do was think and make desperate phone calls.

In some ways, this curse has turned out to be a blessing. Looking at the evolving situation from the comforts of my west-coast home-office is far mellower than Friday’s scene at Pearson International where I had a cell phone barely balanced in one ear and my laptop precariously balanced on my knees. Screaming kids, jangled nerves and sudden gate changes made for a complicated working environment. Bad as it was, my experience was nothing compared to what people in and around Yahoo would be going through.

For those who spent last week living under a rock or those like me who had a passable excuse for paying less attention than they should have, Friday was one of those days when extraordinary forces combined to alter the trajectory of the universe. Cats almost turned into dogs and the precipitation (in Toronto at any rate) actually fell upwards towards the sky. Friday was, to say the least, an intense day.

They Did What?!?
Early Friday morning, word leaked from the sedate Microsoft campus in Richmond Washington about a hostile takeover bid for Yahoo. Offering what was then 66% above common share value, Microsoft had dangled a $44.5 billion carrot in front of Yahoo’s beleaguered board of directors and more importantly, Yahoo stock-holders.

Behind the carrot is a very large stick. Microsoft is deadly serious about this. It is a battle they can ill afford to lose. Whatever the outcome, remember the date; Friday February 1, 2008. As historic moments go, this one is bigger that it might appear at first glance. British historian James Burke would call it a day the universe changed.

Reaction was swift and for the most part positive. Everybody except Google appears to want it to happen. Yahoo needs to be supported and Microsoft needs to be uplifted. Neither company can hold its own against Google making this proposed purchase (which in reality is a completely hostile bid) one of the rare examples where the loss of a major player produces a more competitive environment.

Yahoo shareholders really, really want something to happen in Sunnyvale while they watch the value of the company they partially own decline in comparison to Google, quarter after quarter. Advertisers need competition in a marketplace which is currently dominated by Google. Innovators and inventors need a healthy second set of eyes to develop new products for and, most importantly, the world needs as many credible information resources as possible. In most eyes, the number of reasons it should happen far outweigh the number of reasons against it.

Aside from the logic of the takeover, there doesn’t seem to be much the Board at Yahoo can do to stave off the bid. The proposal Steve Ballmer and Co. have put in front of Jerry Yang and Co. is poised like a series of guns to their heads and timed to give Microsoft as many triggers to pull as possible. After last Tuesday’s dismal Q4-2007 report, the board of directors at Yahoo is a terrible position. Stockholders have lost the last ounces of confidence that kept them holding on as their shares threatened to dip below the $20 level. A revolution is brewing among the masses and moral within the company is said to be at an all time low.

Apparently, Microsoft anticipated and took advantage of the terrible quarterly report, approaching Yahoo executives moments after the report was issued, giving them 48-hours to respond before making the offer public knowledge. According to industry blogger Kara Swisher, Yahoo executives were stunned by the way Microsoft has acted. “I woke up this morning and couldn’t believe that they did it,” said one exec. “They had made a lot of overtures, but this was astonishing. I could not believe Microsoft would be so aggressive.”

Those who don’t learn history are fated to… Ummm, forget it.

Nevertheless, they are in no position to reject the offer outright. Yahoo’s board has been meeting since Friday to consider its options. Those options, by the way, are quickly running out. There is not a lot of room left for Yahoo to maneuver in. Now Yahoo is left looking for an “anyone but Microsoft” option.

The problem with an “anyone but Microsoft” option is that it does’t present a wide array of real options. Yahoo is an extremely expensive bobble to buy. An offer of $44.5 billion is a staggering amount of money making this proposal the second highest in business history. Even Microsoft with its multi-billion dollar revenues is thought to have to borrow money to finance a purchase of Yahoo. Imagine the technical infrastructure a possible suitor requires BEFORE making a bid for Yahoo. Buying a new vehicle that is approximately the size of an aircraft carrier is a rather silly notion if you don’t have somewhere to put it or the technical ability to use it. There are only a handful of companies on Earth large enough to comfortably consider taking over Yahoo.

Of those other companies large enough to enter a serious counter-bid, the most likely one, News Corp. has already pulled its name from the ring. Already the proud proprietor of MySpace, the Wall St. Journal and literally thousands of print and online publications, News Corp. is thought to have the financial and technical weight to pose a challenge to Microsoft’s offer. What they don’t seem to have is the desire. News Corp. officially said on Monday they would not be entering a bid for Yahoo.

Another serious contender, if it were truly interested, would be TimeWarner. It would be an interesting irony if the board at TimeWarner decided to throw its considerable weight into the ring. Eight years ago, TimeWarner was bought by AOL for $60 billion in the largest business deal ever made. That deal, incidentally, precipitated the great dot-com crash of 2000, an event Yahoo has never fully recovered from. Since then, TimeWarner has relegated AOL to a back-burner concern or has ignored it altogether. Speculators have long thought TimeWarner is looking to off-load AOL to a reasonable buyer but it faces a similar problem. There is simply no interested party large enough and rich enough to actually buy it. Given the difficulties TimeWarner has had in the Internet space, it seems unlikely they are going to mount a counter-offer. If they did they would force Microsoft to up its original bid of $31/share.

So that leaves… Well, nobody. There are few off-shore organizations capable of acquiring and running Yahoo and given the obvious legal, financial and national security implications, are even fewer who would be allowed to.

For those reasons and more, most search marketers seem to have a gut-check feeling that the Microsoft takeover should go through. Our interests are best served by the development of a truly competitive environment in the marketplace. As it stands today, Google’s dominance of both organic and paid-search overshadows any pretence of competition in the space. Whether Microsoft can succeed where Yahoo failed is wide open for debate but there are no other credible players apparent on the horizon.

If the Board at Yahoo rejects Microsoft’s initial offer, an ugly and expensive proxy fight is going to ensue. Yahoo has a shareholders’ protection provision that states a specific entity can only control a 15% stake in the company. That means that Microsoft can’t simply arrange to buy up 51% of the shares. The only way to control Yahoo is to control or compel its Board of Directors.

The Board answers shareholders directly at an Annual General Meeting. One of the tools Microsoft is going to use is the voting rights allowed to Yahoo shareholders. Control the flow of open votes at the Annual General Meeting and you have a heck of a lot of leverage with which to compel that Board to do something. Perhaps a vote on the share offer could materialize? Another tactic will be to have a slate of candidates lined up to take seats on the Board. If, at that AGM, people more friendly to Microsoft’s interests are elected to Yahoo’s Board, a deal goes through.

There are a lot of angry shareholders out there and Microsoft will not have a difficult time convincing many of them about the wisdom voting Redmond’s way. Most just have to look at the market’s reaction to get a sense it is the right way to go. Shares in Yahoo nearly doubled in value on the news of Microsoft’s offer. At the same time, share prices of Google have dropped significantly since Friday opening below $500 this morning.

In the meantime, what does this mean for webmasters, search specialists and the general public? For now not very much and yet everything, both at the same time.

Outwardly, nothing is going to change immediately. This deal will take months, if not years to go through. Yahoo will still be Yahoo, Microsoft will still be Live and Google will continue to rule the roost. YSM will continue to operate as it does, as will AdCenter. Yahoo will continue to deliver reasonably good search results and Microsoft will continue to wish it did as well.

Inwardly (and over time publicly), lots of stuff is going to happen, no matter what the outcome of the takeover bid. Yahoo seems to be mortally wounded, if not in body most definitely in spirit. I do not expect to see a lot of innovation coming from Yahoo in the next few quarters. Yahoo’s staff has put in an extraordinary effort over the past few years to play catch-up against Google while integrating an endless series of acquisitions and newly minted corporate or divisional plans. The lifespan of a fresh idea is chaotic, short and brutal in such an environment.

Meanwhile, Microsoft is moving forward with desperate aggression. They NEED to make this deal happen. There is no way they can compete in the coming decades without buying their way to the top. Yahoo has the right mix of technologies, marketplaces and opportunities, one of the largest of which provides exactly the right stuff for the resurging display market.

Yahoo has Right Media. Coupled with aQuantive, an acquisition of Yahoo gives Microsoft a far larger footprint in the display advertising market. Display is seen as one of the most solid forms of digital media advertising as it lends itself to so many formats yet retains many qualities and concepts of traditional print advertising. Google’s pending purchase of DoubleClick makes the merging of Right Media with aQuantive so necessary that little else makes sense.

Again, no matter what happens in the coming weeks or months, this deal is going to take a very long time to work through. While the takeover bid and subsequent chaos runs its course, expect Google to mount as many obstruction plays as it possibly can while taking advantage of what is likely to be a certain period of inertia as Yahoo and Microsoft untangle this sudden affair. This is an area where things are going to be interesting.

Business as a Cold War
Serious skullduggery, spy vs. spy, fear and loathing and all such fun stuff. Google is going to take full advantage of Yahoo’s weakness though they are not likely sure exactly how they will go about it. It might not be too far a stretch to expect a sudden release of dozens of new Search, Ads and Apps features. In similar circumstances Sun Tzu might have written, “Strike while the iron is hot, especially when that iron is pressed to your main enemy’s neck by your other enemy.”

While Microsoft busies itself busting Yahoo, expect Google to push forward with its ultimate Microsoft threatening application, Google Docs. Underlying the development of Google Docs, which is already a credible alternative to Microsoft’s Office suite, is the concept of “cloud computing” or software applications that reside on a server as opposed to your hard-drive. Imagine a day when the Internet becomes the operating system and Google Docs are more advanced than Microsoft Online Office. Steve Ballmer does. So does Eric Schmitt.

The longer the hostility drags out, the better it is for Google. There are dozens of ways Google can position roadblocks to slow Microsoft’s momentum the first of which has been signaled with suggestions of anti-trust concerns in the IM and email fields. That’s just one of several interesting hurdles Google can hurl in the path of Microsoft’s progress. As I suggested, things are going to get silly in the ugliest sorts of ways.

It is unfortunate that Ask.com is not likely to gain a lot from the chaos. According to industry sources, another form of chaos reigns at parent company IAC with nervous shareholders staging a revolt against CEO Barry Diller. Word is that IAC will continue to fund the marketing of Ask.com but is not willing to throw a lot of money into improving technologies. (Luckily, Ask.com is already far ahead in the technology and innovation department) Ask is not likely to be part of any last minute hail-Mary options for Yahoo.

It is sad to suggest Yahoo should go away. For one reason or another, almost all of us have a soft-spot for Yahoo. While I would not wish to characterize Google or Yahoo as either side of the Cold War, the imminent passing of Yahoo recalls the day in 1989 when we learned the Soviet Union had given up its ghosts. The border between east and west had been opened and the extraordinary changes that have happened since were about to suddenly start. That’s where we are today.

To keep it most simple, think about this as a long game of baseball. The game itself is mostly made up of delicate field mechanizations and physics vs. physical strength and physics. There are long pauses of what appears to be inactivity between pitches. As soon as the ball leaves the pitcher’s hand, it is in play and anything can happen. That’s the beauty of baseball and, in a brutal way, the beauty of big business.

We’ve been waiting for what has seemed like an eternity while Yahoo changed coaching staff, players and pitchers. It’s too late for that, the ball is in play and ANYTHING can happen.

2 Comments »

  1. “Yahoo will continue to deliver reasonably good search results and Microsoft will continue to wish it did as well.”

    This part made me chuckle a bit. One thing I did find interesting in this post is that many of the individual services (ie. ask.com) may slip between the cracks, getting little to no attention or advancement. This says to me that Google still has the upperhand, even with the merger.

    Comment by Dara — Tuesday, February 5, 2008 @ 3:30 pm

  2. Great article and review of the players and what to watch for in the coming months as this deal unfolds. I wonder if Microsoft will be able to maneuver the aircraft carrier once they get it. If Microsoft can drive there new boat once they get will it be enough firepower to do to Google what they did to Netscape.

    Comment by Jim — Wednesday, February 6, 2008 @ 7:42 am

RSS feed for comments on this post. TrackBack URI

Leave a comment