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.

MSFT showing signs of desperation

This really goes on to show the pathetic situation of MSFT. Most of the folks here and elsewhere like to blame the YHOO BOD, but the real story here is that MSFT can't let go of YHOO. This is their last ditch effort to try to acquire YHOO for cheap and hoping that it doesn't tank their stock any more than it has. Its a gamble that they will most likely lose. After Aug1, Yang will win the shareholder vote and the only way MSFT can acquire them would be at a price $33+ and they'll get a much weaker YHOO compared to when they started bidding. Yang is not desperate to sell, especially if the buyer is MSFT. But that is the only move for MSFT on the chess-board, so it has no choice but to pay up.

MSFT is like the guy who bids 20% below KBB price for a used car, and stands in line for public transportation every day, hoping that someday the bid will succeed. Yes, indeed they will succeed one day, but then realize that what they ended up buying was a lemon, because YHOO in this case is a fast depreciating asset. Its just the nature of the industry and the strong position of Google, more than anything else. Yang has managed to sustain YHOO against the GOOG juggernaut. Compare his performance in internet domain to Gates / Ballmer @ MSFT or the guys running AOL. Replacing Yang will only speed up the decline of YHOO.

Those who still like to badmouth Yang and praise Ballmer's conduct throughout this process, I suggest looking at the numbers. YHOO is up about 25% and MSFT is down about 20%. That is the real story. Everything else is a shell game, by folks who have their own agenda.

I'm hoping that YHOO hits ~$25 tomorrow so I can sell and get ready for the next iteration, when MSFT "walks" again after Yang wins the Aug 1st shareholder vote.

For folks paying attention to my comments - I picked the recent bottom on YHOO at ~$19.75 and also predicted ~$25+ on MSFT, which happened last week. My other prediction is GOOG and MSFT would approach each other in market cap in about 6 months. They are getting closer. The difference is down from about ~$91B to ~72B, since I first wrote about this. The GOOG earnings report is due soon and that should help as well.

My earlier comment on Jun. 24th is worth repeating here for context.

Rav (URL) said:
Jun. 24, 1:38 PM

1. MSFT talks to YHOO about acquisition.
YHOO goes up and MSFT tanks...
2. MSFT walks.
YHOO goes down and MSFT stuck in neutral.
3. Go back to step1 for next iteration.

While MSFT keeps playing those games with YHOO the end result...
- YHOO gets weaker in the market, but still stays significantly higher than its pre-MSFT-bid level of $19
- MSFT loses about 5-10% on every iteration above. Its already down from about $32.5 pre-bid to about $27.5. There's another iteration in progress and the walksters are trembling.
- GOOG improves its market share v/s YHOO+MSFT and laughs its way to the bank. It also has YHOO trapped in a deal where it fills GOOG's coffers one way or the other..

This is great if you are GOOG long, MSFT short and can time the waves on YHOO.

Wednesday, July 2, 2008

My comment yesterday

This so called "humiliating detail" indeed confirms that YHOO was engaged in serious negotiations with MSFT. It was MSFT who wasn't serious about its offer of ~$33 and also about offering any valuation guarantees, as has been obvious based on its recent behavior. Its quite well known that YHOO was negotiating for a deal between $31 and $37, but was more concerned about valuation guarantees and regulatory issue, which MSFT chose to ignore throughout the negotiation process. It was Ballmer who chose to walk, not YHOO.

Well my comment yesterday was prescient... YHOO is headed to ~$22 preopen. Here's the comment again:

Rav (URL) said:
Jul. 01, 12:23 PM
I guess, its time for another "partial" bid from MSFT. Perhaps this time they offer to buy 30% of YHOO at ~$32. The MSFT stock action seems to indicate that. $26+ is here and next stop $25? Ballmer has made a laughing stock of all the walksters.

YHOO's powerpoint did an excellent job of showing how ridiculous MSFT's so called partial bid was and don't forget that MSFT was raving about the deal in that leaked memo to its own employees.
Its clear from YHOO's SEC filing that MSFT has been a bad apple throughout this deal - no pun intended.

All you YHOO ranters, here's something to keep things in perspective. During all this hoopla about MSFT's on again and off again bid the end result so far is that YHOO has outperformed MSFT by about 25%. Numbers don't lie, people do.;range=20080130,20080701;compare=yhoo+goog;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

MSFT is in a no win situation. If they don't buy YHOO, GOOG will eat their lunch and dinner. If they buy YHOO (or whatever is left of YHOO) decline will be even more precipitous due to integration issues and all the merger related bad-blood. Vista is such a bummer that people prefer "upgrading" to XP. What's to stop them from switching to MACs pretty soon.

With YHOO stock already down to ~$19+, the expectations are set so low that even a modest boost from the GOOG deal will be enough to sustain the stock. Then there are MSFT put, PE put, AOL/Myspace put, asian assets etc... It may be good stock to own in this kind of recessionary environment because its correlated more to the deal action rather than the macro factors. "

Tuesday, July 1, 2008

Time for a new bid from MSFT?

I guess, its time for another "partial" bid from MSFT. Perhaps this time they offer to buy 30% of YHOO at ~$32. The MSFT stock action seems to indicate that. $26+ is here and next stop $25? Ballmer has made a laughing stock of all the walksters.

YHOO's powerpoint did an excellent job of showing how ridiculous MSFT's so called partial bid was and don't forget that MSFT was raving about the deal in that leaked memo to its own employees.
Its clear from YHOO's SEC filing that MSFT has been a bad apple throughout this deal - no pun intended.

All you YHOO ranters, here's something to keep things in perspective. During all this hoopla about MSFT's on again and off again bid the end result so far is that YHOO has outperformed MSFT by about 25%. Numbers don't lie, people do.;range=20080130,20080701;compare=yhoo+goog;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

MSFT is in a no win situation. If they don't buy YHOO, GOOG will eat their lunch and dinner. If they buy YHOO (or whatever is left of YHOO) decline will be even more precipitous due to integration issues and all the merger related bad-blood. Vista is such a bummer that people prefer "upgrading" to XP. What's to stop them from switching to MACs pretty soon.

With YHOO stock already down to ~$19+, the expectations are set so low that even a modest boost from the GOOG deal will be enough to sustain the stock. Then there are MSFT put, PE put, AOL/Myspace put, asian assets etc... It may be good stock to own in this kind of recessionary environment because its correlated more to the deal action rather than the macro factors.

Tuesday, June 24, 2008

This is great!

pathetic? Are you kidding? This is great!!...

1. MSFT talks to YHOO about acquisition.
YHOO goes up and MSFT tanks...
2. MSFT walks.
YHOO goes down and MSFT stuck in neutral.
3. Go back to step1 for next iteration.

While MSFT keeps playing those games with YHOO the end result...
- YHOO gets weaker in the market, but still stays significantly higher than its pre-MSFT-bid level of $19
- MSFT loses about 5-10% on every iteration above. Its already down from about $32.5 pre-bid to about $27.5. There's another iteration in progress and the walksters are trembling.
- GOOG improves its market share v/s YHOO+MSFT and laughs its way to the bank. It also has YHOO trapped in a deal where it fills GOOG's coffers one way or the other..

This is great if you are GOOG long, MSFT short and can time the waves on YHOO.

Monday, June 16, 2008

More predictions

Guys, I'm out of town so won't be able to spend too much time on this, although I find this topic very interesting. Meanwhile, I'll just refer you to my blogpost on June 6th. This was written before any of the recent events. I'm glad that its turning out exactly as I expected so far. I had also predicted that YHOO will settle in the range $21-23, at which point it becomes a buy. I put my money @ 22.71. If things work out as I expect, then YHOO will settle around $25 by the time the shareholder meeting is done. Then in six months MSFT will end up buying YHOO at $34-35, out of desperation. Standard disclaimer: outlook depends on Mr. market remaining normal...

So enjoy..

@Alex Schleber

I'm glad that you enjoyed my "tongue-in-cheek" post on what APPL should do to MSFT. For a moment I thought the readers of this blog lost their sense of humor along with the $$ bet on a YHOO acquisition..

Friday, June 13, 2008

Here's an idea for AAPL to consider

Apple should make a bid for MSFT's (smartphone + OS + mp3 player) assets for 5B$ cash. This should include all OS assets including: Code, people, servers, data centers, patents, customer accounts, knowledge-base, buildings in redmond etc.

Combination of cost savings and revenue boost would drive at least $5 billion in incremental operating income to MSFT per year. Apple can then kill all flops like zune, vista etc. As part of this deal Apple should buy 16% of MSFT, using its high PE stock, hoping that some of the PE rubs off on MSFT stock. MSFT should discontinue all its investments in zune+xbox+OS as part of this deal. They can then focus all their energy in making Office work better as the primary goal for the new lean and mean organization.

The combination of the OS, phone and music player assets would unlock new R&D innovation, eliminate redundant engineering efforts and allow for greater scale in serving customers.

Taken together, I believe this proposal would create total value for MSFT’s shareholders in excess of $45 per share. Heck, just a single presentation by Steve Jobs could do this. Btw, its just an estimate, so don't hold me to it.

If MSFT rejects this unsolicited deal from AAPL, pundits can then start analyzing, how crazy it is for MSFT to have rejected this deal.

Difference between MSFT and GOOG

Not content with spinning to the rest of the world, now MSFT has resorted to spinning to its own employees.

Read the following two articles that came out today and you'll know how MSFT strategy compares to GOOG. Which strategy do you think would be the winner?

An analogy

The bottomline is this: MSFT wants to milk the YHOO cows without owning them (I believe analogy is Icahn's). GOOG wants to provide YHOO with a gadget that improves the yield of its cows. YHOO is free to use it on whichever cows they choose and on whatever days it suits, as long as GOOG gets a small cut, everytime they use this gadget. GOOG is very clear that they are not trying to own the cows or milk the cows.

Which one is better: Microhoo or GooHoo?

I find it hard to believe that MSFT can monetize better and generate more cost savings than GOOG. The comparison that you are doing is not apples to apples and somewhat dishonest. If you really want to compare then use the same assumptions in both cases.

Assume that _ALL_ queries are outsourced to GOOG or MSFT and YHOO shuts down its internal search related development and support. In that scenerio, I'm sure the boost in YHOO operating income would be significantly higher with the GOOG deal. The $250-$450M they are talking about is based on long-tail which is hard for YHOO to monetize currently, and I'm sure would be hard for MSFT as well.

The way YHOO-GOOG deal is currently structured, eventually they would have flexibility to move towards the goal of full outsourcing, once all the regulatory hurdles are out of the way. So over the long run, GOOG deal would be less risky and a better choice compared to MSFT deal, in terms of monetizing the search share that YHOO holds.

Ring out MSFT, Ring in GOOG

M wants Y. Always wanted Y from last couple of years. But M never wanted to pay a fair price and just bully their way in. M also wanted Doubleclick. But it didn't want to pay. Let's just say that M got Doubleclicked again. Now I won't be surprised if they get pissed off at another loss to GOOG and blow their money on a fad like facebook (just as they did with Aquantive, after they lost Doubleclick). M should realize that its not the nineties anymore and their empire is in decline.

With Gates out and a stock that's been floundering for a decade, MSFT is like a headless chicken running around scared, without clear strategy or goal. All they can hope now is that their buddies in the govt can slow down the GOOG juggernaut. But GOOG has already played this game and played it well. Look at their success in getting DCLK approved and also the wireless spectrum opened up. Look out for more FUD and spin from MSFT. For example:

I think its time for MSFT longs to wake up and smell the coffee. Use this short term pop to get out from the past (MSFT) and get into the future (GooHoo). This isn't really about Y. Its more about the war between G and M, and there is still time to be on the winning team.

Thursday, June 12, 2008

What's up with MSFT?

@Victor - I don't think Yang said no to $33. Yang countered $33 by $37 and was probably expecting Ballmer to come back at $35. In fact Ballmer pulled a fast one on Yang and immediately pretended to walk out of the deal. He never tried to negotiate beyond the verbal offer of $33 without any details. You can't call this a mistake because even other big shareholders like Miller were expecting around ~$35 as a reward for holding YHOO for several years. MSFT played the same kind of trick again this weekend. They don't seem to have a sense of urgency or a sense of direction. In the process both MSFT and YHOO are getting weaker and GOOG is getting stronger every day. Not that there is anything wrong with it. :-)

Remember Terry Semel tried to buy facebook for 1B$ and then changed the price to 800M$ at the last moment. MSFT is trying to do the same with YHOO. But they fail to realize that Yang is not desperate and the GOOG boys are his buddies. So he won't stab them in the back, unless the MSFT offer is really really good...

Ballmer Balked and Walked!


Very good observation. As Yang said earlier, MSFT didn't specify clearly what they mean by $33 offer. I'm sure YHOO BOD offered to agree to $33 last weekend, with the valuation guarantees. MSFT must have balked at those and walked. This would be very useful for YHOO BOD, when they defend their actions in court. They can just say, "Ballmer Balked and Walked"!!

Rationale for buying YHOO today

Victor, I agree with you regarding GOOG. You'll see that I'm fan of GOOG as well, if you follow my posts.

My YHOO position that I just started today is at $22.71, and is small relative to GOOG. I think its a good hedge against GOOG. If MSFT takes out YHOO close to ~$33, it will cover the potential negative effect on GOOG. If they don't then I have Icahn working on creating value for my YHOO shares. Note that MSFT still has some partial offer that they believe is worth more than ~$33 outstanding for YHOO.

Btw, does anyone know if my shares bought today are eligible for voting in the YHOO shareholder meeting?

MSFT still interested?

Take that - CNBC says MSFT still interested in partial transaction, not in acquiring all of YHOO. Hahaha... no respite for walksters. The millstone is still around MSFT, and its stock is still at ~$28, much lower than ~$32 when this drama started with MSFT's bid.

Can someone tell me what's new here?
1. MSFT still interested in partial transaction, not in full deal. This is exactly what Ballmer has been saying since the AllThingsD conference.
2. YHOO has said several times, MSFT is not interested in full acquisition.

Only thing new I see is that YHOO is closer to a GOOG deal than ever, and significantly cheaper than yesterday.

Long live GOOG-YHOO monopoly

Just bought some YHOO at 22.71$ to go with my GOOG. Guys, wish me luck!

Long live the goog-yhoo monopoly!!!

GOOG + YAHOO ? Really??

This should make it a lot more interesting, if it really happens

Ready for the proxy fight?

@xfactor, @LFerguson, @jon

I don't understand your comments primarily indicating that I'm cheerleading YHOO. I think MSFT is clearly the loser here, which is the gist of my comment, which you seem to have missed. Its stock is down from ~$33 to about ~$27 since they announced the deal. YHOO stock is up from $19 prior to deal announcement to about $26 today. Also it was close to ~$30 in the interim. So those holding YHOO stock had plenty of opportunity to sell close to ~$30, which is better than any offer that MSFT made in the interim. Of course, this is taking into account the delay in regulatory approval etc. For argument's sake, if we assume that Yang had accepted a 50% cash / 50% stock deal from MSFT at $33. The stock still would have traded close to $30 or could have be even lower if MSFT stock crashed even more due do dilution. And its not clear if Ballmer would have offered that deal, since he didn't specify the cash/stock split when he offered $33. So Yang did well to reject the deal without any valuation guarantees from MSFT.

@The illusionist

I agree that its a "calculated risk" that Icahn is taking. He has long term option positions (nov 2010) and he can afford to wait. If anyone believes that he wouldn't want to wait and would be out soon, why would he buy long-term options? He indicated on CNBC that he is prepared to wait even 6 months if required.

I think he believes that the downside in YHOO is limited due to two factors
1. MSFT desperately needs to do something about its rapidly dwindling search share. Its cash cows are soon going to be eaten by GOOG, AAPL, ADBE etc. The only move that MSFT has is to buy YHOO, to get the scale to compete with GOOG. Even Ballmer said that in this "walk" letter. And I'm using "compete" in a loose sense, because GOOG is like a freight train running at top-speed.
2. GOOG won't let MSFT acquire YHOO for cheap. If you look at the events so far, anytime MSFT got close to buying YHOO for its bid price, "persons close to the situation" come out of the closet and talk about an imminent search outsourcing deal between GOOG and YHOO.

If the deal happens, it won't be based on how much MSFT can afford to pay without tanking its stock, but it will be based on how desperate MSFT is to have some semblance of competition with GOOG. This is really bad news for MSFT stock, some of which is already reflected. If Yang wins the proxy fight, there is nothing that would force him to negotiate in MSFT' favor. So the price-tag would go up and not down as most of the pundits expect.

Based on my reasoning, I believe that GOOG will do well, MSFT will keep going down and YHOO will remain neutral until the proxy fight, relative to the market. In the proxy fight I believe that Yang will win with 1-2 seats conceded to Icahn. If YHOO stock tanks to $21-23 range at that point, it would be a good time to buy YHOO, just as it was after MSFT walked. But its unlikely in my opinion.

Is MSFT still interested in YHOO?

Let's look at those statements one at a time:
* Microsoft has lost interest in the deal -
MSFT would like everyone to believe that. But remember that they also keep saying that all options are on the table and they reserve a right to go for a full acquisition of YHOO at a future date. The way its stock has been trading lately, seems like nobody except for Henry believes that MSFT has really lost interest. If MSFT had really lost interest, they would come out with a categorical statement that they are no longer interested in any kind of deal with YHOO and that would support its stock.

* The online display ad environment has deteriorated significantly - This is all the more reason for MSFT to salvage whatever is left of the search market. Only way they can do it is to acquire YHOO.

* Microsoft's stock price has dropped 10% - Well considering its precarious position in its bread and butter markets (office / OS) which would soon go the way of dodo or dinosaur (pick your metaphor), and lack of traction in new emerging markets like online, music, mobile, gaming etc, MSFT doesn't have much of a choice. It can go down without a fight dishonorably or try to fight it out and go down honorably. This is the decision that Ballmer and Gates have to make. I think they will hesitate and when all is said and done will decide to put up a fight. If they end up buying YHOO, MSFT stock will go down because of the high price paid and if they don't buy YHOO, it will still go down because the stock-holders would want to jump out of a shrinking enterprise. Icahn is definitely betting on MSFT's weak hand here.

My yesterday's comment on Icahn's thought process is at:
I think Icahn will come out a winner in this. He will probably get 1 or 2 seats on the board. At that point he will make the YHOO stock acquistion more expensive than the $33 MSFT was offering or if MSFT dithers, put the "goog-deal" gun to its head, which would be the worst nightmare coming true for MSFT.

Everyday that MSFT stock drops, Yang's decision to reject MSFT's low-ball stock swap deal, looks that much smarter. I believe the pundits give lot more credit to Ballmer compared to Yang. But the stock market has showed who the winner is and who the loser is in this saga.

Wednesday, June 11, 2008

What Icahn really wants

If Icahn wins at least 5 seats on BOD, the severance package is triggered. Current YHOO board can't change this even if they want to, the way this package has been structured. This has been public knowledge since the YHOO filing on June 2nd. I guess the media is just waking up, after YHOO reiterated this in their employee Q&A.

I'm pretty sure Icahn was aware of this before getting into the proxy fight. So I don't agree that he would back out and start selling because of this reason.

Icahn is quite aware that MSFT needs YHOO desperately and willing to bet on it. The latest hitwise numbers show that MSFT is down to ~5% of search market and approaching in terms of share. The rate at which MSFT search share is going down and looking at its trajectory, it doesn't seem like ~0% is too far from here. They need to do something and desperate times call for desperate measures.

Icahn's options are dated ~nov2010. So I don't think he has an urgencey to sell out and he indicated on CNBC that he is willing to wait it out. Sooner or later MSFT has to come back and make an offer that YHOO can't refuse. Since its almost impossible for Icahn to win, and may not be in his own best interest due to the triggering of severance package, I think he will negotiate with YHOO board to get couple of seats (1 or 2). He might even win those without having to negotiate with YHOO board. This will give him enough leverage to force a negotiation with MSFT in good faith or seriously explore other deals to improve YHOO stock price.

Also after the proxy fight, current YHOO board will be in a better negotiating position, because their board seats would be secure for a year. This would mean that MSFT might end up having to pay ~$35/share with substantial valuation guarantees. What this does to MSFT stock is anybody's guess, but ~$25 is not out of question.

Friday, June 6, 2008

Icahn playing good cop / bad cop ?

Yesterday I said, "Also both Yang and Icahn, their public spat notwithstanding, seem to be on the same team in terms of objective - selling to MSFT in the mid-thirties, with valuation guarantee". I think today's letter from Icahn confirms this. It looks so much like a good cop / bad cop strategy.

YHOO is the bad cop, and its terms for MSFT deal are:
1. ~$37 negotiable, which means ~$35 with real valuation guarantees. They also have a severance package which is practically comparable to MSFT's offer of $1.5B in terms of cost, although Icahn unnecessarily makes a big deal out of it. No YHOO employee would vote for Icahn, if he keeps doing that, no matter how pissed they are with Yang.

Icahn is the good cop, and his terms for MSFT deal are:
1. ~$34.375, with a real valuation guarantee of ~$33 (note his statement on alternative deals with MSFT). He would like to take off the YHOO severance package, in order to entice MSFT to sign a deal and also allow it flexibility to design the package.

MSFT offer was about $33 with perhaps a valuation guarantee of ~$31 in case of a friendly deal. Considering the beating that its stock has taken since the announcement of the deal, anything more would be detrimental to its stock. I don't think its too concerned about the YHOO severance plan, since its plan was comparable and it is interested in retaining the employees. I didn't see Ballmer making a big deal of YHOO's plan in his letter when he walked.

Also Icahn is talking about just reverting Yang to the "chief Yahoo" role instead of firing him. The conciliatory tone from him indicates that he may be willing to negotiate with Yahoo to get 1 or 2 board positions and back off from the proxy contest. Even with one director, Icahn can facilitate a deal with MSFT by acting as a mediator and preventing any "shenanigans".

Most likely outcome: Icahn gets a board seat, MSFT waits till its stock improves to make any "full acuisition" offer, meanwhile YHOO and MSFT keep talking about "alternative offers". At some point if YHOO stock tanks too much, it signs up with GOOG, with support from Icahn and structure the deal in a way that it doesn't preclude a deal with MSFT.

Thursday, June 5, 2008

What Icahn may try to do

Henry, have you considered the possibility that Icahn may negotiate with Yang to have one or two of his guys on the board thereby obviating the need for a proxy fight? Seems like Icahn is in touch with Yahoo based on his comments yesterday and this sounds like an amicable solution instead of a nasty proxy fight. Also both Yang and Icahn, their public spat notwithstanding, seem to be on the same team in terms of objective - selling to MSFT in the mid-thirties, with valuation guarantee. Both seem to understand MSFT's desperate need for YHOO. Icahn emphasized this as one of the big reasons that he got involved.

Can Icahn win?

Thanks! Articulated very well what I have been trying to convey. There is no way for a rational YHOO shareholder to vote for Carl Icahn - unless MSFT categorically comes out in his support and puts an offer conditional on Icahn taking control of the board. That is highly unlikely considering that Ballmer just said Icahn is acting independently without support from MSFT.

Going one step futher, I believe that Icahn won't lose $$ even if he loses the proxy fight. The reason is that MSFT will still end up buying YHOO at some point in future, if not now then after a few months. If Icahn gets couple of his directors on YHOO board, then they can facilitate the transaction. The price-tag will go up once Yang wins the proxy battle. Also at that point he can easily bid up GOOG against MSFT for its search business, because he won't have to be afraid of losing his seat. A deal at a higher price may be acceptable to all parties, because MSFT would be even more desperate, YHOO and Icahn would want to cash out at a good price and GOOG would have achieved its objective of making the transaction expensive for MSFT and then putting it through the regulatory purgatory.

Wednesday, June 4, 2008

Icahn's dilemma

Looks like finally someone in MSM has realized what Icahn's letter is all about. I have been trying to convey this in my comments during the last couple of days. Let me rephrase one more time:

Icahn can't win support from big shareholders for his slate unless he can get current YHOO BOD to rescind the newly added change in control, because if he wins a majority in the proxy fight, the change in control provisions get triggered, and no right-thinking big shareholder would like that. That's absolute worst case for shareholders because even if Icahn wins, there is no guarantee that MSFT would come back with an offer in mid-thirties that Icahn is looking for and there would be liability associated with the change in control.

What are the chances of current board rescinding the change in control provisions? Will the current board voluntarily make it easy for Icahn to win the proxy fight? That's the whole point of adding those new terms and conditions. As per these articles, some lawyers argue that at this point YHOO board can't voluntarily rescind those provisions, even if it wanted to.

So its quite possible that Icahn will have to take this to the court or just give up on taking control of YHOO board.

How YHOO may respond to Icahn's letter

Henry, as I mentioned earlier, the severance agreement or the poison pill, whatever we call it, applies to all full-time employees in YHOO, not just the top executives. Also from the YHOO sec filing yesterday, this poison pill would get triggered even if Icahn takes control of the board (i.e >=5 board members). So it would be difficult for Icahn to rally support for his slate, with the "change in control" provisions that guarantee significant benefits to _ALL_ fulltime employees of YHOO. MSM seems to miss this point.

Icahn's letter sounds like a ploy to get rid of this change in control provision, so that its easier for him to rally support for a proxy fight. I can't imagine big shareholders supporting Icahn's slate unless the new change in control provisions are taken out by the current YHOO BOD. Based on the history so far, its going to be an uphill battle for Icahn trying to get YHOO BOD to take off the provisions without a stronger and well-defined offer from MSFT. MSFT could offer a better offer conditional on YHOO taking off those provisions. But considering the beating its stock has taken so far, this is very unlikely.

YHOO can respond to Icahn letter saying that they are just trying to retain and attract employees with these new change in control provisions - considering that MSFT's offer has caused significant uncertainty as to the future direction of the company.

From YHOO's filing: "The Change in Control Severance Plans are designed, in light of the uncertainty caused by the Microsoft proposal, to help retain the Company’s employees, maintain a stable work environment and provide certain economic benefits to the employees in the event their employment is actually or constructively terminated in connection with a change in control of the Company."

Icahn - fan of James Bond movies

Icahn's letter to YHOO today. Very interesting to read. Especially the part dealing with James Bond...

Seems like Icahn is pressuring YHOO board to take off the poison pill.

Tuesday, June 3, 2008

Heading to the Delaware Court?

Here is a nugget from YHOO's sec filing today. If I'm interpreting this correctly, then YHOO shareholders, especially the big ones, won't dare to vote for Icahn slate - because if Icahn wins a majority, it may trigger the poison pill automatically. Anyone else would like to weigh in?

I see this heading to a Delaware court one way or the other.

"As previously noted, the Icahn Entities have provided notice that they intend to nominate their own slate of ten (10) nominees for election as directors at the annual meeting. Under the Change in Control Severance Plans, a change in control is deemed to have occurred if the members of the Board of Directors as of February 12, 2008 (and any new directors whose appointment, election or nomination to the Board of Directors was approved or recommended by a vote of at least two-thirds of the directors then in office who were either directors on February 12, 2008 or whose appointment, election or nomination for election was previously so approved or recommended) cease for any reason to constitute a majority of the Board of Directors. If five or more of the Icahn Nominees are elected to the Board of Directors at the annual meeting, a change in control will be deemed to have occurred for purposes of the Change in Control Severance Plans."

Icahn's Public Statement on Yahoo today

I believe YHOO BOD will announce a deal with GOOG after today's board meeting (if there is one). I'm sure during all the recent discussions with MSFT, including the one in the golf cart, they may have offered other low-ball offers and ways of breaking up YHOO, which won't be acceptable to YHOO. MSFT has made amply clear that they are not interested in full acquisition at this time. Their stock in tanksterville confirms that even if they want to acquire YHOO completely, there is no reasonable way that their stock can support such a deal. The key detail in Icahn's announcement today is that now he is convinced as well that there is no quick deal with MSFT acquiring YHOO completely as he was hoping for. He must be tracking MSFT stock with the same intensity as his YHOO holdings to have reached this conclusion.

Since the full deal with MSFT is unlikely and NOBODY, including the activist shareholders in YHOO, other than MSFT, is interested in a partial deal, what are the options? Only alternative for YHOO board is to sign a deal with GOOG and hope to win the proxy fight based on the results of that deal.

Monday, June 2, 2008

The equation


My theory is that GOOG and MSFT will approach each other in market cap within 6-8 months. So watch this equation (9.31*MSFT-0.313*GOOG) B$.

My rationale

@Oli Burgess - If you heard bill gates at the allthingd, he sounded like a very risk-averse guy. If you look at MSFT history they do well only in the risk-free returns kind of situations (like monopoly situations, where the risk of failure is extremely low). They have never made a huge acquisition bet (relative to their market cap) unlike say oracle or cisco, which are acquisition driven companies. If you really believe that deal with MSFT is close, can you propose the stock price that MSFT would offer and the cash/stock split? When you do this, also think about the reaction of MSFT stock to the news and the probability of YHOO accepting that deal. With the current stock prices and the recent public statement from MSFT and YHOO, the deal seems even more unlikely, because MSFT stock won't be able to support anything close to what YHOO is looking for, but who knows....

@Steve Baldwin - I'm surprised at your surprise. If you look at the YHOO chart in the time period 2005 to early 2006, it was always over $30. So anyone who got options during that period won't make anything with the proposed MSFT offer. Most folks at YHOO including the employees must be hoping for a deal in $35-40 to really make anything significant. If the merger doesn't do this for them, they have a better shot staying independent and hoping for better days. Of course the stock holders who bought recently for quick gains, would see this in a different light. I doubt if the longer term holders like Bill Miller would be happy if the deal gets done ~$30, with no significant cash component, because YHOO has been mostly trading in the $30-40 range during the last few years, before it dropped in the $20-30 range.

What is the stock market saying today?

What the stock market seems to be saying is that MSFT has lost its opportunity to make a deal. Its stock is at ~$27.5. At this point if they announce any kind of deal to acquire yahoo, regardless of the price and value guarantees, MSFT stock could very well go to ~$25. I doubt if Gates would approve such a deal. Yahoo is also at about ~$26. Look for YHOO to announce a deal with GOOG soon to support its stock and pacify the activist shareholders.

Last time I mentioned this - the delta between GOOG and MSFT was about $90B. Today its about $77B. Look for this to fall fast with the next 6-8 months.

Wednesday, May 28, 2008

Thoughts based on Yang and Ballmer interviews at AllThingsD

Now that we have heard both versions - Ballmer's and Yang's, I find Yang's version as more credible. Ballmer has emphasized that the main reason for the failure to close the deal is difference between the bid and the ask. Yang and Sue say that even if they had agreed on a price, it would just take the discussions to the next level. They still had a lot of things to discuss and agree on - namely, the valuation guarantee, regulatory issues etc. Since MSFT never brings up or talks about these issues, which are quite important in my opinion to the acquired party, they don't seem to be serious about paying up the appropriate price and acquiring Yahoo. This also explains their abrupt walk without indulging in serious negotiations.

Even now MSFT doesn't seem serious because they keep coming up with these ridiculous proposals of acquiring parts of Yahoo. Why should Yahoo agree to any of these? Is there one good reason? Only thing that MSFT brings to the table for Yahoo is cash. Since MSFT is interested in the deal and not YHOO, the terms have to be closer to YHOO's expectations. The people who like to berate Yang, need to understand this and the fact that all he is trying to do is get a better deal for YHOO, which is his fiduciary responsibility and also a rational thing to do with him holding substantial amount of stock. There is no sense of urgency for Yang, because even if MSFT pretends to walk again and again, there will still be a MSFT put supporting YHOO stock and also the hope of potential deal with GOOG. This is the reason that Icahn and his buddies took out long term positions in YHOO.

One thing is clear after the interviews on D, that MSFT and YHOO are miles apart in terms of their perception of the current status. MSFT still believes and hopes that they will be able to acquire YHOO for cheap, especially with the shareholder activism. They are just keeping enough of an interest in the deal to dissuade YHOO from signing up with GOOG. Unless MSFT categorically declares that they are not interested in any kind of deal with YHOO, its difficult for Yang to sign up with GOOG and justify the action with the shareholders, especially before the proxy fight.

I think MSFT is betting that Yang will feel pressured and sign a deal as the proxy fight nears. However this is a risky bet, because Yang may indeed go for the proxy fight and win it. In that case it would be even more expensive for MSFT to come back to the negotiating table. Once the proxy fight is out of the way, there would be nothing to stop Yang from signing up with GOOG, which is his preferred alternative, as he has made amply clear several times. Both GOOG and YHOO have similar cultures and mutual admiration, so there shouldn't be any execution risks.

Now coming to the question of mis-management of Yahoo, I think it was primarily Terry Semel's vision that was responsible for Yahoo's strategic failures. Sue is a fine executive and Warren Buffet wouldn't have her on the BRK board unless he was convinced of this. Also, primary reason for Yahoo's decline in last couple of years, that is not obvious for most observers is that their competition GOOG is too strong and a better player. If you can hold your own against Michael Jordan and lose the game, you are still a decent player. If we compare to MSFT's failures against GOOG, even after billions of dollars poured into its online endeavors, YHOO seems to have done much better relatively.

Hypothetically speaking, if GOOG could acquire all of YHOO with no regulatory issues, what would be the market price for YHOO? The price that YHOO is looking for seems reasonable, if GOOG and MSFT had to bid against each other to acquire all of YHOO. MSFT is just trying to undercut its bid for YHOO, by using the regulatory hurdles against GOOG acquiring YHOO, to its advantage. Yang and GOOG guys realize this and won't let it happen, no matter what the rest of the world thinks.

Sunday, May 25, 2008

Deal or Bust?

I think this report from Kara sounds most credible so far compared to so many others before this. I really believe that this is a game of chess between the Emperor (Bill Gates) and the Princes (Google boys). Ballmer and Yahoo guys are just pawns and other pieces in this game. The decision to walk when the deal seemed so close was not typical Ballmer and had all the finger-prints of someone who is a great strategist like Gates. But MSFT is in a precarious position, because either strategy (buying or walking) can lead to a sharp and significant drop in its future value and clout. Without the potential deal from GOOG, Yang wouldn't have been able to defend the castle for long. I don't think GOOG will leave any stone unturned to defend their search cash-cow from MSFT, even if they have to do a "live cash-back style" deal with YHOO, where they make nothing and pass on all the benefit to YHOO. In that case it would be difficult for DOJ to do anything, because its a case of no.1 helping no.2 rather than hurting it by doing something anti-competitive. Also joeblow's "boats that float" argument would float as well.

Icahn and other corporate raiders are just opportunists who see an ideal arbitrage opportunity with very limited downside. They must really believe that YHOO's potential value is in the $30-35, regardless of whether MSFT buys them or they sign an ad deal with GOOG. That's the reason that they have bought substantial stakes. The strongest justification is that YHOO is the only strategic imperative for MSFT for getting the scale that they desperately need. So even if they walk again, it doesn't preclude them from returning to the table again, which should support YHOO stock in that scenario. Also Icahn bought options dated 2010, which means he is not concerned about the timing of the deal and is prepared to hold longer term if there is a delay in the resolution. Another reason might be that he doesn't believe a deal is going to get done within couple of months, and so decided to go longer term.

I also agree with the "weekend or bust" aspect of the current status of the deal because the sooner YHOO signs up with GOOG, sooner they can derive the financial benefits, which will improve their position in the proxy fight, which is likely to be after the earnings report for the current quarter. They are perhaps waiting for the categorical statement from MSFT, that they have "REALLY" moved on and are not interested in any kind of deal with YHOO. If MSFT issues this kind of statement soon, then YHOO will immediately sign up with GOOG and support its stock. If MSFT doesn't issue such a statement, then the status quo may continue for some more time as there is no urgency for YHOO to sign up with GOOG. However considering the beating that MSFT stock has taken since the day this deal was announced in end of Jan, and it seems to be getting worse, the pressure is on MSFT to make a final statement on the deal and prevent any further drop in its value. I'm sure the walksters are hoping for this as well. The stock market hates uncertainty more than anything else.

The odds above seem about right, except for the price I think. I expect the price to be around ~$35 with a significant component of value guarantee, if indeed MSFT and YHOO agree to a full acquisition. I guess its obvious that this is the worst nightmare for the walksters. It may also be perceived as negative by some of the trigger-happy GOOGsters, although long-term it would be great for GOOG because MSFT and YHOO together would sink much faster in the online waters due to the additional momentum and weight. The deal would be accretive in that sense. :-)

I never put any faith in MSFT's attempts to do a partial deal with YHOO, because if it was so difficult to come to terms on a full acquisition, imagine the difficulty of doing a partial deal. I think this was just a delaying tactic by MSFT to buy some more time, no matter what the sources say. Its much easier to do partial deals with willing partners. That's the reason its more likely with GOOG.

Friday, May 23, 2008

Can MSFT live-cashback win?

@Alex Schleber

Excellent post. Very persuasive arguments that no one else is writing or talking about in the mainstream. I think MSFT is so desperate for action on, that I won't be surprised if they offer a matching program where they add to the cashback offered by advertisers, from their own pockets. Otherwise there is no value added, because there is nothing that stops the lowest bidder from offering the same deal on google. The additional advertising cost can be easily made up by the higher volume due to more eyeballs on google.

One thing you missed is that the cashback will be paid after 60-days, which reduces the value of that for most buyers looking for instant gratification. There is no justification for this delay, unless there is an intention to reject some of the legitimate cashbacks by the sellers, which would be a customer service and PR nightmare. Why can't they make it an instant rebate?

In the off-line world, sometimes manufacturers and stores offer significant mail-in-rebates because not 100% of those are claimed. Here they can't do this because there are no hoops to go through and presumably most folks will get the rebates. That's one less incentive for sellers to offer significant rebates.

History is not on MSFT's side on this one - A9 by amazon, iwon, ebates, even MSFT couple of years back, have all failed trying to do this.

I believe that GOOG will win the CPA wars with its better and more granular technology compared to MSFT's live cashback model. If I have to compare - GOOG's model is more like Priceline and MSFT 's offering is similar to hotwire/expedia/kayak. Ultimately a sustainable model like Priceline wins and has no credible competitors. A model like hotwire/orbitz/expedia/kayak which anyone can easily replicate is not very sustainable.

Last chance for MSFT?

As I have been saying, MSFT is between a rock and hard place here. If they panic and buy all of YHOO in a friendly deal for ~$35, look for their stock to trade around ~$25, at least in the near term. This will be because of the valuation guarantees and the collar in any deal that YHOO agrees to. The price will be between the $33 - $37 range that has been discussed, but it will be a capitulation by MSFT, because of the valuation guarantees. The stock market will quickly figure this out.

If they give up and let GOOG sign a long-term deal with YHOO, the MSFT stock may get a temporary bump, but it would be a strategic blunder long term, because they would never be able to get the scale to compete effectively with GOOG. Its articulated very well in Ballmer's "walk" letter and also the transcript of the town hall meeting.

I think YHOO BOD is now is a much stronger negotiating position with the shareholder's meeting pushed out after the next earnings call. Don't believe all the rumors and innuendo about YHOO board coming out in the press. They are most likely stories planted by MSFT. YHOO hasn't even acknowledged that they are specifically talking with MSFT about breaking up YHOO. The only thing coming out of YHOO is the news about imminent deal with GOOG. This is probably the last weekend for MSFT to put up (i.e. pay up ~$35+ on YHOO's terms) or shut up, because YHOO would want the revenue bump from GOOG deal ASAP, so that it is in a good position to win the proxy fight in end of July.

Thursday, May 22, 2008

Yahoo's gameplan

I think this is an interesting twist in this saga. The YHOO BOD thought process may be as follows:
Sometime next week announce a deal with GOOG. The effect of this deal to the bottom-line will show up in the next YHOO earnings call in third week of July. If YHOO shows significant and promising improvement in both top-line and bottom-line, then it will be very hard for Icahn to win the proxy battle. The shareholder meeting would be in a few days after the earnings announcement.

This move implies that current YHOO board is determined to fight it out at the shareholders meeting. So the chances of any kind of deal with MSFT have gone down, unless MSFT pays up ~$35+, which is unlikely.

Icahn and YHOO sec filings

I think Icahn's filing is fine and before the deadline. Apparently there were some more shareholders who nominated candidates and they didn't follow the bylaws as per Yahoo.

Icahn's filing has details on all his recent YHOO transactions - interesting to read.

yahoo's filing:

Icahn's filing:

Google's approach to CPA

I thought the comment about how google is experimenting with CPA by converting to CPCs was quite interesting. Your live notes seems to skip that. I think he gave an example about how a $20 CPA could be converted to a number of CPCs at the regular CPC price of $0.4 for that keyword. So the advertiser would have an option of bidding for CPA or CPC, but internally it gets converted to CPC. He mentioned that this provides a lot more granularity.

I think this is a lot smarter and granular way of going about CPA, rather than the 60-day cashback that MSFT is offering.

Wednesday, May 21, 2008

Live cashback - GOOG killer or AMZN killer?

Henry, if that is correct, then it is a more direct assault on amazon and ebay. I understand that amazon refused to sign up which could be for this reason, but I'm surprised that ebay has signed up. It will basically kill the "buy it now" deals on ebay. Perhaps ebay signed up because MSFT allowed paypal as one of the means of paying the cashback.

Also, the only items that AMZN would now be able to sell easily are those that are priced lower than live cashback. That should kill their margins.

One potential issue here could be the reliability of the merchant, but I don't see any b&m retailer or etailer winning here. It sounds like a "race to the bottom" in terms of pricing for those guys.
Just as travel sites like are killing the traditional airlines ticketing model and travel agencies, this would have a negative effect on the overall retailing business.

How much of a dent it make to GOOG is debatable, because the value proposition there is not just cost but overall quality of results. And a significant component of the clicks that GOOG gets are from folks that are not specifically looking to buy, but click on an impulse and some of which gets converted to actual sale. So until MSFT succeeds in getting the eyeballs, its not going to have any material effect on GOOG. This explains why MSFT is anxious to get more eyeballs.