Yahoo – Microsoft Talks Declared Fully Dead – Now what?

Microhoo is not going to happen. This time, it’s officially over.
The deal Yahoo! repeatedly turned down was killed by a press release issued by Yahoo! earlier today. Though deader than a doornail, the defunct deal saddled both firms with chains as heavy as those Marley’s ghost carried. Buckets of blood have been spilled on the floor and ill-will stalks the great halls of finance and tech. The fallout is coming and after such a protracted and intensely acrimonious battle, that fallout is probably going to be ugly. Today, we start to learn what real days of reckoning look like.

This is not a good day to hold share in Yahoo!. If you live in Europe, it started OK but quickly started to degenerate just after noon when Yahoo! announced the conclusion of talks with Microsoft. The smart ones who had their broker’s number on speed dial might have stood a chance. They can be counted among the lucky.

North American shareholders, on the other hand, are not so lucky today. Today kinda sucks actually. Many lost a lot of money in a few short hours as YHOO’s value tumbled over 10% to close at $23.50, three dollars below its opening at $26.33. It could have been worse. Around 3:30 eastern, shares had dipped a dollar lower to $22.50 each. Nevertheless, those holding YHOO have seen thousands, in some cases, millions of dollars disappear. When the final repudiation of the Microsoft offer was announced, the last pretense of shareholder salvation had evaporated, the promise turned into a mirage.

And what promise it was. When Microsoft first offered the equivalent of $33/share on the last day of January, YHOO jumped from a low of $19.18 to $28.38 the next day. It eventually peaked at $29.98 on Valentine’s Day. Between then and now, the Microsoft offer was one of the most talked about and over analyzed deals ever. It would have been the second largest in US business history and among the most historic. It certainly would have radically changed the nature of search and the Internet. And if it happened, it would have made a lot of people a lot of money. Therefore the speculators moved in.

On March 17, YHOO watchers started noticing something weird. The Yahoo! board was doing everything in its power to prevent Microsoft from getting the company and share values had been declining. Opening at $25.85, YHOO began another rapid rise, peaking a few days later at $28.99, the highest point it has been valued at since. Clearly someone or something was buying up shares. The story was getting juicier.

A week or so later, it was revealed that legendary corporate raider Carl Ichan had been grabbing as many YHOO shares as he could find, eventually amassing approximately 6% of the company. Ichan had one message for Yahoo! CEO Jerry Yang, “Sell or I’ll make you sell.” Ichan threatened a proxy fight, much like the one everyone expected Microsoft to wage. Ichan appeared a bit more serious in his threat, that is until he put forward a list of names that included Mark Cuban (who sold Broadcast.com to Yahoo! for $5.7billion in the crazed days of the first dot-com bubble). The tech world got a laugh seeing Cuban’s name there and Yahoo!’s current Board sprang back into action by issuing several scathing reviews of Ichan’s perception and performance.

While we’re on the topic, if your name is Carl Ichan and you hold more of YHOO than any other individual outside the company itself, this is an especially dreary day. You just lost a gazillion dollars and your nefarious plans were spoiled by a bunch of meddling kids. Ya win some, ya lose some eh?  Few of us will ever lose so big.

Yahoo!’s Board might have lost bigger than they realize. Unless they have a doozy of a deal lined up with Google, one that makes Yahoo! a hell of a lot of insta-cash, they are in for an even rougher ride than expected at their annual shareholders meeting, which was pushed back a full quarter to August 1. Yang and co. have some explaining to do, big-time. Shareholders who hold on now are either in for a continuing roller coaster ride or they are about to discover what happens when said roller coaster jumps the tracks.

Yahoo! lost talent today too. The purple bleed continues and this time, the wounds struck close to the heart. Beloved blogger Jeremy Zawdony, executive VP Jeff Weiner and Chief Data officer Usama Fayyad all announced departures today. As one can imagine, there is a run on aspirin in the San Jose region this evening. Anyone without a headache at this point simply isn’t thinking hard enough.

Lost money, lost talent, lost opportunity. If you think its bad for investors (and believe me, it is), imagine how yucky it must be for the workers.
Pity the poor Yahooligans. Perhaps those let go in the February/March purge were the lucky ones. The survivors have to continue living in a nightmare of uncertainty where the only thing one can count on is a sense of being trapped. Think of the thousands of brilliant workers who are living in a special kind of chaos last seen off Broadway in some dinner-theater version of “No Exit”.

(I’d pay good money to see that, btw… if anyone knows of a dinner-theater anywhere in the world doing No Exit, please let me know. The tackier the better. Such weirdness should be savored, enjoyed and turned into an absurdist play in its own right. Until then, the Yahoo! saga will have to suffice. jh)

If today wasn’t bad enough, wait until tomorrow and next week. Rumours are still circulating saying Yahoo! is going to cede the search space to Google in the coming days. While that is not a likely outcome, it is almost certain Yahoo! will give Google a run on their results pages, basically a run for their money. In a short test period last month, Yahoo! found that Google AdWords paid better than Yahoo! Search Marketing ads did.

There are only two things standing in the way of a total Google-Ad monopoly. The first is the scorned suitor, Microsoft, the second is the US Government via the Securities and Exchange Commission and the Federal Trade Commission. Microsoft will raise hell with any level of the US Government if Google gets the deal it really wants at Yahoo!, so a full monopoly is not going to happen.

Something is though. Google and Yahoo! executives are exploring a partnership of some sort or another. Details are amazingly sketchy, the only certain thing being something is brewing between the two. Here’s what I think is going to happen.

-pure speculation alert-”If the following was not 100% speculation, you would not be seeing this warning. The following is pure speculation.”

Google needs to present a win/win situation for Yahoo! To keep things cool, it also needs to give Microsoft a bit of a win. Google already knows that AdWords blows the two competing ad systems away. Yahoo!’s test run confirmed this, at least from a revenue standpoint.

Google is great at determining which ad is best to place against which query. They are also good at bid-balancing, the process of ensuring the advertiser pays the lowest amount possible while Google receives the highest revenues per ad possible. It’s truly a neat trick that Yahoo and Microsoft have not fully learned.

I forget where I read about the concept a few weeks ago but the idea of establishing a multi-platform advertising system that allows advertisers to choose the platform they wanted place the ad on and that picks the best ads from all inventories to place on a page, would be brilliant. In other words, I think Google is going to come up with a plan that presents a win/win/win solution to a puzzle which Google believes it has already won.

That sort of system would make Yahoo a bit more money, give Google a lot more real-estate, and force Microsoft to focus on its technical systems as opposed to the regulatory systems. Ultimately, Google is fully confident in the knowledge that their ad-system is the better mousetrap. Some winners are more equal than others.

-/pure speculation alert- The pure speculation part of the piece is now concluded

So what about the rest of us? Now what?  Aside from watching the most brilliant business soap opera move into syndication, what happens to the search engine landscape? Probably nothing much. Organic search will still be organic search. Paid search will still be paid search though it might be a bit more efficient. Ads will appear against keywords and the clients of good SEOs will continue to be found first.

There will be a touch of turbulence in the display advertising market though. This is a bit of fallout nobody is talking about but display was actually considered one of the prizes back in the heady days of February. Over the past six months, display has taken a fall from favour and Yahoo!’s weakness is partially caused by the weakening display market. A deal involving Yahoo!’s RightMedia asset and Google’s DoubleClick asset might be in the works but there appears to be far less chatter about display than there is about search.

All in all, this has been a more interesting day than most. Historic ones often are. The outcome of today’s dramas remains totally unclear with two notable exceptions. Microhoo is no more and investors are really, really angry. Everybody except Google got hurt today. There’s more to come tomorrow.