Wednesday, August 6, 2008

Icahn-Yang partnership

This is non-news. The real news is that Icahn has just joined YHOO board. Now look for Icahn to turn the screws on MSFT by blessing the YHOO-GOOG partnership. Icahn knows how desperate Ballmer is, because he has been "negotiating" with Ballmer. Get ready to see the Icahn-Yang partnership in action.

Monday, August 4, 2008

Future of YHOO

Henry, best way to deal with those kind of comments is to ignore them. I have been following your coverage very closely and I can say without any hesitation that your coverage has been honest and unbiased.

Just waiting for a bad day on the market to initiate a position in YHOO. Through its schizophrenic behavior, MSFT has amply shown that it would definitely end up acquiring YHOO at some point. Yang and Bostock winning has ensured that MSFT would have to pay a pretty penny in a deal that guarantees valuation. However, it would take a couple of bad quarters from MSFT to push them over the edge, so it has to be a long-term play, which is quite typical of Icahn's investments (e.g. Imclone).

Thursday, July 17, 2008

Another letter from Yang

A succinct letter from YHOO was posted today, indicating why shareholders should vote for current board and not Icahn. Its clear on all the facts and nicely put. After reading this letter, its obvious that voting for Icahn would be a really stupid thing to do in the current scenario.

I think this thread is misguided. Yang never wanted to be CEO and was forced into that role, because Terry Semel sucked big time and had to be fired. Also they had become quite complacent and lost their sense of urgency. But now that they have been constantly pestered by MSFT, they are taking all the right decisions and seem to have fire in their bellies.

They have already signed a deal with GOOG, which can generate significant additional cash flow. Its also in GOOG's interest to have some credible competition in the form of independent YHOO, so that they don't get under the anti-trust scanner too often. The terms of GOOG deal are very good for YHOO and still leaves YHOO flexibility to consider other transactions. In this latest letter they are also talking about spinning off Asian assets.

I think Yang's win on Aug 1 is almost a given, unless they screw up big-time in their earnings, which doesn't seem likely. This may cause a short-term drop in the share price. But this will also get rid of the YHOO employees who are simply hanging on to make some bucks out of MSFT deal. Short-term holders who bought simply to ride Icahn's coat-tails will also bail out at that point. I think that would be an opportunity to get into YHOO at a reasonable risk-reward valuation (under $20). In another year's timeframe, MSFT will be really desperate for growth and will end up having to pay the valuation guarantees that YHOO is asking for and MSFT has balked at so far. They really don't have any other hope of gaining a foothold against GOOG.

Monday, July 14, 2008

Three blind men and an Elephant

I was going to raise the same point as Peter above. It sounds like MSFT misread the impact of their latest maneuver. After reading all the negative things in the press and looking at the tepid response from the YHOO shareholders who are soon going to vote, I think MSFT decided to back-pedal and soften their tone. So now they are trying to put a spin on the turn of events. We get statements out of MSFT like - it was not a joint proposal, it was just a beginning of negotiation and not an ultimatum, there was no 24-hour deadline. Its no different than their tactics throughout this process. First they offer $31, and mumble couple of bucks more when its rejected without giving out the details and then within hours they pretend like they are no longer interested and "walk". Only to come back later with another complicated offer. They keep repeating these "walk" and "crawl back" sequences, with a loss of about 10% in MSFT stock every-time they do this.

Note that both YHOO and Icahn have filed the details with SEC. So I would definitely treat those versions to be more credible. Also both these versions are consistent with each other on facts and only differ on interpretations, unlike the statement from MSFT.

At this point, I'm convinced that MSFT is not in a financial position to do a deal for all of YHOO that has valuation guarantees, (like an all-cash deal for example), and that would be acceptable to YHOO shareholders. If they try to do this, their stock would lose even more value. So the only choices they have are:
1. to wait it out till either their stock improves or YHOO's stock drops.
2. do a partial deal that locks up YHOO, significantly limiting its options.
3. just give up on competing with GOOG, gracefully accept defeat and resign to the fate of losing their top-dog status.

I don't think (1) will happen, because whenever there is even a hint of YHOO deal getting closer to completion, YHOO stock appreciates and MSFT drops. (2) won't be acceptable to current YHOO shareholders and they may decide to wait for the current quarterly results and the annual meeting. (3) is something that is unthinkable for a company like MSFT, which has never lost that status so far.

Prospects of YHOO after Aug1


Yang of Terry Semel days is different from the Yang with his baby and legacy on the line. I believe he now has fire in his belly. He has already taken some steps under duress like negotiating an outsourcing deal with GOOG, which was often talked about by analysts but was never considered by him. Also this time he knows that his time is limited and engineers work well under time constraints. So he won't be averse to making bold decisions like firing non-performing folks and improving the financials, focusing on core strengths of YHOO and benefiting from the revenue flow from GOOG.

The trump card is going to be desperation of MSFT. The earnings report from MSFT is critical. If the prospects for Vista and Office look bleak, then MSFT won't have any choice but to bet on a YHOO acquisition. Mobile is already lost to Apple and MAC is growing fast as well. GOOG earnings would be important because they would be an indicator of the growth prospects of the online economy in a recessionary environment. If GOOG comes out with blowout earnings, MSFT would be even more desperate to buy YHOO.

My personal strategy is to hope for YHOO win on Aug1, and then start a position in YHOO in the aftermath.

GOOG deal v/s MSFT deal


Good post and a very good point. Guarantee is meaningless if tied to traffic. Think about what this means. If MSFT wants to reduce its commitment to YHOO under this deal, all it needs to do is to degrade its ad placement technology which shouldn't be too hard to do (may even happen naturally with Powerset :-) - no pun intended).

Compare this to the GOOG deal:
1. GOOG deal is non-exclusive. YHOO can choose to partner with others. MSFT deal is not only exclusive, but it also puts restrictions on potential transactions that YHOO may want to do, as per YHOO's press release.
2. YHOO can choose to increase or decrease the traffic outsourced to GOOG as it pleases. So it has full control and it can benefit from improvements made in-house. MSFT deal essentially means killing its internal ad placement efforts (which are second-rate) and go with third-rate technology developed my MSFT.
3. GOOG offers better TAC rates than MSFT.
4. GOOG has a lot more inventory and significantly better technology, so click-through and conversion rates should be significantly better than MSFT.

It would be interesting to see how this plays out at the Senate hearing. I think GOOG will contrast its offer with that of MSFT and show that a non-exclusive deal with full flexibility for YHOO is definitely not as anti-competitive as the exclusive and restrictive deal offered by MSFT.

It seems like Icahn and MSFT are grasping at straws here, without making any significant effort to work out a deal that would be acceptable to most shareholders of YHOO and current BOD. In fact Icahn is now helping MSFT to milk the cows without paying for them.

Possible outcomes after the Aug 1 shareholder meeting


Henry has a good post on why the latest MSFT offer sucks. The cash dividend part is appealing to Icahn because it will reduce his risk and lower his cost basis.

As Henry rightly pointed out in the latest post, if Icahn wins, MSFT has more leverage and I believe that the deal could go as low as ~$27 or even lower. That may still be acceptable to Icahn because he would make about 10% profit for all his efforts. Chances of a quick deal are high in this case. YHOO stock may get a short term bump on this outcome. I think MSFT may even decide to play hardball and try to squeeze Icahn, based on its behavior and tactics so far. So this can't be good outcome for long term holders of YHOO.

In the alternative scenerio, if Yang wins, I don't see him being desperate to sell, since he has a full year to prove himself. He may want to give GOOG deal a chance, while he improves the financials of YHOO. So the chances of a quick deal go down significantly. The deal would then happen closer to ~$33 and will depend on how desperate MSFT is at that point. I think YHOO wouldn't back off from their current offer of $33, and may not try to bid up the price. The discussion may be more on cash-stock split, valuation guarantees, regulatory issues etc. Since there is more uncertainty with this outcome, YHOO stock may go back under $20, immediately after the shareholder meeting. But long term holders of YHOO won't be fazed by this.

The third possibility that MSFT acquires all of YHOO, before Aug1st seems very unlikely to me, because of the bad blood between both the parties. Icahn seems to be on a defensive here. In his latest filing he admits that MSFT is no longer interested in full acquisition and also is looking to postpone the shareholder meeting. So YHOO seems to have an upper hand here

Details of Icahn deal

Fernando, the details of how Icahn believes its a valuation of $33 are in his SEC filing. Asian assets are valued at $9/share. Remaining shares are valued at $19.5. Additional amount is in the form of cash injected.

If Icahn really believes in that math, he should just take the company private with his buddies and help from MSFT at $33/share. Then he can "realize" that value. I'm sure current YHOO board would be open to that. But this won't happen because that $33 valuation that they come up with is fuzzy math and has uncertainties associated with it.

One interesting thing in that filing is that Icahn and presumably MSFT are looking to extend the date for the shareholder meeting and YHOO didn't agree. It means that YHOO is more confident of winning the Aug1 vote compared to Icahn.

Sunday, July 13, 2008

Latest maneuver from MSFT

This latest asinine maneuver from MSFT will only strengthen the support for Yang in the proxy fight. Everyone that I read has been critical of this move and folks like Fernando who were avid supporters of Icahn are switching sides. MSFT is playing all these games in such an awkward manner that you gotta wonder if someone is sleeping at the wheel there.

All those folks (Henry included) who claim that Yahoo is now begging for a deal, seem to have lost perspective. YHOO hasn't budged from its position. They countered MSFT's $33 by $37 earlier and were hoping for a deal in the $35 range. They have backed down by about $2 to $33 which is just 6% lower than what they were looking for. During this timeframe MSFT and the overall market has gone down by much more. So realistically speaking its an improvement over the $35 that YHOO was looking for earlier. This is a very smart move by YHOO, because it shows the true colors of MSFT. It makes it obvious that MSFT never intended to guarantee the valuation of the deal and were never serious about their $33 offer as they claim to be.

Here is an excerpt from my other comment showing, what the deal would be worth today if YHOO had accepted the $31 stock+cash offer from MSFT.
"MSFT's only well-defined offer for YHOO so far was for $31 / share, half in cash, half in stock. MSFT stock has lost about 20% during this time. So that deal would be worth about $27.9/share today. MSFT stock has lost about 20% without the bid being accepted by YHOO. If YHOO had accepted the bid, its not unreasonable to assume that MSFT may have lost about 10% more. This would put the deal around ~$26.25. Then there is regulatory uncertainty and almost 9-12 months of scrutiny. Discounting that YHOO would probably have traded close to ~$25 had Yang accepted the original $31 offer from MSFT. It has been trading in that ballpark during the last few days. The market and economy have severely worsened during this time. That would have put even more downward pressure. So it wasn't illogical to have rejected that offer."

In light of the above comment and the fact that YHOO is negotiating for $33+, it seems like YHOO is negotiating from a position of strength and is confident of winning the proxy fight. If YHOO wins the proxy fight, all this bad blood from MSFT and talk of firing the current board will only make the cost of eventual acquisition go up for MSFT, with lot less value in return for that. The simple logic that a weakened YHOO is great for GOOG, which will then deploy its additional strength against MSFT seems to beat the execs at MSFT. That's the reason that they are playing these silly and childish games with YHOO.

Thursday, July 10, 2008

Who is inconsistent - YHOO or MSFT?

Guys, lets do some math here.
MSFT's only well-defined offer for YHOO so far was for $31 / share, half in cash, half in stock. MSFT stock has lost about 20% during this time. So that deal would be worth about $27.9/share today. MSFT stock has lost about 20% without the bid being accepted by YHOO. If YHOO had accepted the bid, its not unreasonable to assume that MSFT may have lost about 10% more. This would put the deal around ~$26.25. Then there is regulatory uncertainty and almost 9-12 months of scrutiny. Discounting that YHOO would probably have traded close to ~$25 had Yang accepted the original $31 offer from MSFT. It has been trading in that ballpark during the last few days. The market and economy have severely worsened during this time. That would have put even more downward pressure. So it wasn't illogical to have rejected that offer.

I can agree about the mismanagement of YHOO during the Semel days and Yang's inaction during that time. However, I think his actions since the MSFT bid have been quite reasonable, based on the math above. No matter what you think of Yang, you have to certainly agree that MSFT has been very inconsistent throughout this process, which may hint at ulterior motives and put a question-mark on their sincerity. All the Gordons and Millers of the world could not have predicted this inconsistent behavior of MSFT. That's the reason they didn't pressure Yang to accept the deal at $31 early on and were holding out (and still holding out in some cases) for more.

Yang's case

Yang is just laying out the facts. There is no spin or fiction in what he said. YHOO shareholders got plenty of time to unload in high twenties. Those who are still holding are either the greedy ones who jumped on the bandwagon after the MSFT bid was announced or those who sincerely believe that YHOO is worth ~$30+ to MSFT and that MSFT doesn't have any other choice than to buy YHOO to be able to compete with GOOG. The former deserve to lose and are the disgruntled types who may vote for Icahn. The latter are the ones that will vote for Yang and hope that MSFT will come back with a realistic offer in $30-35 range with valuation guarantees, once Yang's position is secure after the shareholder meeting. No sensible shareholder of YHOO would vote for Icahn, unless he can guarantee a MSFT deal in the $33+ range, as Bill Miller suggested. That's not going to happen based on MSFT's behavior and crashing stock. So what Yang is doing is just pointing out the obvious to those disgruntled shareholders, who still think that bringing in Icahn would somehow improve the prospects of a favorable deal with MSFT.

Wednesday, July 9, 2008

Price of YHOO

As I said in earlier comments - MSFT doesn't have any other move in this game of chess. Buying YHOO is the only move if they have to survive and have some semblance of competition against GOOG. They tried to go at it alone for a long time with nothing to show in terms of results except for lost billions.

Also, Yang is not desperate to sell. By its conduct throughout this process, MSFT has amply demonstrated that it is the desperate party. If the deal happens then the price won't be determined by how much MSFT can afford to pay. It would be determined by who the desperate party is and how desperate that party is. A low-price deal can happen only if Yang, Icahn and Ballmer get together and come up with some kind of compromise deal before Aug1. What are the chances of that happening? If the proxy fight gets to Aug1, then Yang will most likely win it and then the price that MSFT will have to pay for YHOO will go back to the $30-35 range.

I don't agree with the last line in your article. The stock price is determined by the bid and ask prices. If the spread is large then the less desperate party gets to decide the ultimate price. Post Aug1, with a new one year lease Yang will have a stronger hand and MSFT will be the even more desperate.

For example, when you go to buy a car, the price is not determined by what the buyer can afford to pay. Since MSFT can't afford to buy all of YHOO, without significant dilution to its stock, they are also considering leasing options - like the partial deal. All the factors like the scarcity value of YHOO assets, nuisance value of YHOO-GOOG deal for MSFT, value of asian assets, future growth prospects for MSFT in a world dominated by GOOG etc. will play a role in determining the price that MSFT will end up paying for YHOO.

Bill Gates is the smart one here. He is getting out just in the nick of time, leaving Ballmer to manage and hold together the crumbling empire.

MSFT close to $25, as I predicted

Henry, don't you think its time for your hedge fund buddies to start rumors about Ballmer quitting instead of Yang? After MSFT put the bid for YHOO, there is no change in status quo. YHOO is still independent. Only change is that YHOO stock is up about 20% and MSFT is down about 20%.

I have to admit, I'm really surprised that absolutely no one in the MSM is talking about the steep decline in MSFT stock-price, while they seem to derive a lot of pleasure in going on and on about YHOO and Yang. Here's an idea. If you really want to be different than the MSM, then start writing some articles which have "MSFT" and "Titanic" or "albatross" in the title, for example.

For those who are keeping track - (MSFT - GOOG) is about $65B today, and GOOG's earnings is next week.

MSFT: time to put up or shut up

In other words, what Bill Miller is saying to Icahn and obliquely to MSFT is same as Yang. Its time to put up or shut up. What MSFT said to YHOO shareholders is you guys fire the current board and then maybe we'll come back with another low-ball offer, once Yang is out of our way. Its gonna be a low-ball offer, so we don't want to talk numbers now. MSFT position is ludicrous because they think that YHOO shareholders are stupid enough to get conned by them without any concrete offer on the table.

If MSFT is really serious about this, like they profess to be, they should come up with a concrete offer with cash/stock split specified, conditional on the current board being fired. Then the shareholders have something to work with instead of empty promises. But as Yang said MSFT has no intention to buy YHOO and just want to harm it, which is understandable considering they are no.3 and YHOO is no.2 in search.

Tuesday, July 8, 2008

Trading YHOO

Sold YHOO at $24+. Waiting for MSFT to "walk" again, after Yang wins on Aug1. 21% gain (from $19.82) in few days... Thanks MSFT.