Thoughts based on Yang and Ballmer interviews at AllThingsD

Rav said:

May. 29, 2:38 AM

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.

Deal or Bust?

Rav said:

May. 25, 6:09 PM

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.

Can MSFT live-cashback win?

Rav said:

May. 23, 2:21 PM

@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 live.com, 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?

Rav said:

May. 23, 11:05 AM

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.

Yahoo's gameplan

Rav said:

May. 22, 7:56 PM

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

Rav said:

May. 22, 7:46 PM

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:
http://www.sec.gov/Archives/edgar/data/1011006/000089161808000285/f37157prpre14a.htm

Icahn's filing:
http://www.sec.gov/Archives/edgar/data/921669/000092847508000191/0000928475-08-000191.txt

Google's approach to CPA

Rav said:

May. 22, 5:09 PM

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.

Live cashback - GOOG killer or AMZN killer?

Rav said:

May. 21, 7:14 PM

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 kayak.com 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.

More on Live cashback

Rav said:

May. 21, 5:09 PM

The key question to ask here is who is paying for the cashback. If we assume that its the advertiser, then what's stopping the same advertiser from offering the same deal on Google? If its MSFT paying a significant portion of this cash back, then I don't see how this is good for the MSFT shareholders because it will be a drain on its cash-flow. If the search share improves it will only be temporary, until this promotion is on. This has been the case in past attempts by MSFT to pay the searchers. Most people will still go to Google for search and some will go to live just for the cashback, only after confirming that the deal is better than what they find on google.

The feature itself is not new. There are tons of sites which already offer price comparison and rebates. The price comparison sites will be fine, because they can just combine their results with the results from live, and tell the consumer about the best deal, which in some cases may end up on live.

Its bad for the advertisers because it will squeeze their margins if they have to foot the bill for the cashback. Its fine for the advertisers as long as MSFT provides the service and foots the cashback bill. The moment this stops, the advertisers will bail. Footing the bill forever is not sustainable for MSFT. Its already losing billions on its online efforts and spending on cashback would make the situation even worse than it already is. Its bad business because the amount of money MSFT loses would be directly proportional to the growth in its search share. Google didn't grow big by losing money dotcom style. In fact they were consistently profitable throughout their brief history.

How would GOOG respond?

Rav said:

May. 21, 3:38 PM

I agree that this is a direct and I would say somewhat irrational attack by MSFT on GOOG's cash cow. Gloves are off now. I think the way GOOG would respond would be:
1. Be more determined and aggressively go after the YHOO ad outsourcing deal. MSFT has made it obvious by this move, that their real intention behind getting the scale on internet search is to kill the market, not milk it. This is what GOOG guys are afraid of. They don't mind competition as long as its fair and based on merits and not on subsidy. This is also the reason that Yang is reluctant to sell out to MSFT.
2. Undercut MSFT with Google apps. I wouldn't be surprised if they soon provide a fully functional offline office applications package, without requiring gears and internet connection.
3. Go after the WIN XP and Vista markets. I think with Vista getting bad reputation and the significance of OS waning, now may be a good time for Google to get into this market as well. There is a lot of demand for low cost desktops all over the world. This can be their opportunity to hurt MSFT's cash cow. They already have some experience in the OS domain with their work on android and also have a strong brand.

Who suffers?

Rav said:

May. 21, 12:59 PM

On a more serious note, if MSFT continues this for a long time, offline retailers and etailers may both suffer significantly. They are already facing margin pressures due to inflation, falling dollar and a bad economy. If I was AMZN, circuit city or best buy, I would be a lot more worried about this, because once smart folks, the kinds that frequently visit fatwallet and slickdeals, figure out that they can save some $$ going thru live, they would never purchase directly from the AMZN or CC website. The advantage of live would be short-lived because sites like AMZN will demand better deals from the manufacturers or cut their margins.

GOOG may suffer from a perception that this may change the game. But reality is that their business model is quite adaptive because the advertisers bid against each other. If a few advertisers leave, there are a lot more, who are currently losing the bids, that can take their place. Meanwhile if you are looking to buy that fancy camera, here's your chance to go live. Take advantage while it lasts. Reminds me of the webvan and pets.com days.

Lame humor attempt

Rav said:

May. 21, 12:31 PM

In related news:
- MSFT plans to introduce live-pal to compete with paypal. People will get paid to use this service.
- MSFT plans to introduce live-list to compete with craigslist. People will get paid to post ads there.
- MSFT plans to introduce live-bay to compete with ebay. People will get paid to put up auctions there.

Where is all this money going to come from you ask? MSFT is introducing a super-duper-ultra-plush-ultimate-premier version of vista for $499.99, which would be a standard requirement for all future PC buyers that still want to buy XP.

Rearranging the deck chairs on the Titanic?

Rav said:

May. 21, 10:14 AM

Here is a relevant article talking about past attempts by MSN and A9 to kick-back some cash to searchers.
http://blog.searchenginewatch.com/blog/051227-121401

Somebody wisely said, "Those who forget history are doomed to repeat it". Based on failed past attempts, it sounds more and more like an attempt to re-arrange the deck chairs on the Titanic, rather than some truly innovative and disruptive technology. Perhaps folks at MSFT working on this got confused about what disruptive technology means and instead took it literally and decided to disrupt their own already failing model.

MSFT attempts to bribe searchers

Rav said:

May. 21, 9:31 AM

Hasn't Amazon.com already tried this with A9 search engine? Does anyone even know what A9 is anymore? AMZN was in best position to capitalize on this "seach for bucks" trend, since it has a huge retail business model. But it failed.

Also MSFT has tried this earlier on live.com, with a temporary bump of couple of percent points in search traffic, which then reverted back to even less traffic than before the gimmick. Its like hoping that zune will take hold against ipod if only they give couple of bucks back to everyone who buys a zune

Deal or No Deal

Rav said:

May. 20, 11:23 PM

Did anyone notice that YHOO is awfully quiet on the latest discussions with MSFT? All the noise and leaks are coming out of MSFT. Only thing new from YHOO was, "Yahoo! has confirmed with Microsoft that it is not interested in pursuing an acquisition of all of Yahoo! at this time." This protects YHOO against the activist shareholders and those filing lawsuits.

I doubt that any of the MSFT proposals that have been leaked so far are being seriously considered by YHOO. All of them seem less attractive than selling the company outright for around ~$37- that YHOO is looking for. I think as Henry mentioned somewhere, all these leaks from MSFT is just a face-saving maneuver and a way to signal to the activist shareholders that it is still interested and would support them at the appropriate time. It is also designed to postpone the nuclear option for the time-being and buy some more time. The nuclear option being YHOO signing up a long term deal with GOOG, shutting out MSFT forever.

By the same reasoning, GOOG and YHOO are not too keen on exercising the nuclear option unless they are forced to, because its effects are unpredictable and it may backfire. It works better as a threat and has deterrence value as has been amply demonstrated. I think they will exercise it closer to the shareholder meeting and only if it looks like the proxy fight has a reasonable chance of succeeding. Until then it will be just some more hot air from MSFT, unless they decide to cave in and bite the YHOO bullet for ~$35+. At some point Ballmer will realize that every-time he takes some action and makes some announcement, MSFT stock drops another 2-3%. He may decide to take the pain in a single-shot and acquire YHOO on the terms that Yang is asking for. The recent comscore numbers for both YHOO and MSFT are alarming, so he must soon feel some sense of urgency.

I doubt that GOOG will resist the transaction if MSFT ends up paying ~50B$. In fact it may covertly encourage it while overtly opposing and delaying the deal consummation, at least until the new president is sworn in.

Likely outcomes

Rav said:

May. 19, 11:57 PM

The goal of MSFT and GOOG is to slow down and stop each other in their respective strong markets. They are looking at it as a zero-sum game, which is really the problem here. If they just don't compete with each other and enjoy their respective monopolies, they both would do much better. Its easier for GOOG because it has a stronger hand and a growing market. Its more difficult to accept for MSFT as its kingdom is getting smaller and weaker everyday, as its bread and butter markets are maturing.

MSFT's advantage is that it has a much stronger balance sheet and is more diversified. However, this is also the reason that GOOG will do everything in its power to make it difficult for MSFT to get a toehold in the online marketplace. YHOO is just a pawn, means if you will, in the process. So both MSFT and GOOG would want to structure the deal in a way that is exclusive for all practical purposes and leaves out the competitor. GOOG can easily do this because its confident that it can win in a fair and open marketplace due to its technological superiority and network effects. MSFT doesn't have the same confidence. So its trying to come up with a complicated deal which locks up YHOO and allows MSFT to milk YHOO's search marketshare.

Continuing on my analogy in yesterday's comment, now that MSFT can't buy the car, its negotiating the leasing terms with YHOO. Its trying to obfuscate YHOO with the details on down payment, interest rates, monthly installment and so on. But it is missing one important detail. YHOO is the dealer here and MSFT is the hostile buyer, so YHOO will get to decide the terms. And YHOO has some leverage because it already has a friendly and willing buyer in GOOG. There are no angry shareholder lawsuits to fear at YHOO, because the stock has recovered quite well and the board seems to be doing its fiduciary duty by creating alternatives to MSFT bid.

Carl Icahn understands all this very well. The 120M$ that he is up by so far, is peanuts for him. I would be surprised if he makes anything less than 0.5-1B$ when all is said and done. The best position for him to be in is to bid MSFT against GOOG and drive up the YHOO price. GOOG won't mind because it is an insurance policy for its cash printing machine. However, for MSFT it is hard-earned cash accumulated over years that its betting on a coin toss. This is the reason that everytime Ballmer issues a statement about this deal, MSFT stock drops at least 2-3%. This is irrespective of whether he says he is walking or staying.

Most analysts are missing the point that Yang is in a stronger position and its Ballmer who is confused about the next course of action every day. This also explains the whole spectrum of comments coming out of MSFT that leave all options open. I still believe that most likely outcome is either MSFT panicks and pays ~$35 for full acquisition of YHOO in a friendly deal or YHOO signs a long term deal with GOOG in a way that shuts out MSFT from the search marketplace forever. Everything else that happens in the interim would be posturing by different parties

Some wild ideas

Rav said:

May. 19, 7:23 PM

http://business.timesonline.co.uk/tol/business/industry_sectors/technology/article3965206.ece

Seems like Brin wants to hire Yang, in case YHOO shareholders fire him. That's an interesting idea. In that scenerio, some key Yahoo engineers can follow Jerry into GOOG. MSFT and Icahn can then fight over how to split the servers, properties, buildings, parking lots and equipment that cost them billions to buy.

Another wild idea: Ebay should partner with YHOO and auction off individual pieces of YHOO to highest bidder on Ebay. They should only accept paypal for those pieces. This should give a revenue bump and fix Ebay's problems as well. :-)

Icahn's involvement

Rav said:

May. 19, 1:39 AM

@xfactor

Here are my earlier comments regarding Icahn's involvement:

http://www.alleyinsider.com/2008/5/yahoo_to_icahn_you_don_t_get_it_#comment-482d0cab796c7aeb00121455

http://www.alleyinsider.com/2008/5/meet_carl_icahns_yahoo_yhoo_board_icahn_frank_biondi_mark_cuban_seven_more#comment-482c7a5814b9b97e00cdc151

Icahn ready to switch horses?

Rav said:

May. 19, 12:17 AM

Sounds like Icahn is ready to switch horses. Henry, this latest development deserves a new article imho. From the reuters link, a person familiar with Icahn's thinking says, "Microsoft is trying to get the milk without buying the cow".

This confirms my view expressed earlier that Icahn will try to make is more expensive for MSFT.

http://www.reuters.com/article/marketsNews/idUSN1849884420080519

Microsoft's New Deal

Rav said:

May. 18, 11:51 PM

Let's review this step by step:
1. Jan30th - MSFT announces a low-ball bid for YHOO, picking the most vulnerable time for YHOO. The result MSFT stock drops about 10%, YHOO up about 45% since then - still no deal. Score MSFT (0) - YHOO (1)
2. May3rd - MSFT walks thinking that YHOO will tank to the teens with no bid from MSFT and that'll show them Yahoos! Surprise surprise - YHOO and MSFT stocks virtually unchanged since then. Score MSFT (0) - YHOO (2)
3. May18th - MSFT panics at the fearful prospect of a world in which GOOG and YHOO are partners. The deal seems imminent within days based on leaks from both YHOO and GOOG. Icahn proxy fight acts as a catalyst to speed up this process. Something needs to be done and fast. And this is the best they can come up with? No wonder they are so screwed.

Let's parse the statement:

"In light of developments since the withdrawal of the Microsoft proposal to acquire Yahoo! Inc., Microsoft announced that it is continuing to explore and pursue its alternatives to improve and expand its online services and advertising business.",

Our plan of "walking" failed miserably as demonstrated by the stock market. YHOO is getting cozy with GOOG and this is our last chance. Hopefully we don't screw-up this time.

"Microsoft is considering and has raised with Yahoo! an alternative that would involve a transaction with Yahoo! but not an acquisition of all of Yahoo! Microsoft is not proposing to make a new bid to acquire all of Yahoo! at this time, but reserves the right to reconsider that alternative depending on future developments and discussions that may take place with Yahoo! or discussions with shareholders of Yahoo! or Microsoft or with other third parties.

We can't afford YHOO at the current price and valuation guarantees that YHOO BOD is looking for, without screwing our stockholders even more than we already have. We'll try buying again if Icahn can do the dirty work for us, (Icahn - wink, wink) and hands us YHOO on a platter. Until then, since we can't afford the car, we'll try to lease it.

"There of course can be no assurance that any transaction will result from these discussions."

Of course we are not sure if we can ever lease the car since we pissed off the dealer and there is dealer's cousin (GOOG) who already wants to lease.

Yahoo's response to the latest FUD from MSFT:
- You can't buy us, nanny nanny boo-boo...
- You can't buy us, nanny nanny boo-boo...

I think what really happened here is MSFT no longer believes in its convenient argument so far that DOJ would try to block any YHOO-GOOG deal. Its panicked about this possibility and is having nightmares. It realizes that GOOG is smart enough to structure the deal in a way that addresses any DOJ concerns and get a kind of pre-approval for the deal. Look at their performance in the FCC wireless spectrum bids and closing of doubleclick.

Also, they are indicating some support to the Icahns and Paulsons, hoping they can win the proxy fight. Next month should be very interesting, because MSFT may go further and try to get actively involved in the proxy fight if YHOO spurns them again and signs up with GOOG, which is a very real possibility.

Also it gives a potential brownie point for GOOG, if it can prove that MSFT's proposal for partnership with YHOO is non-competitive and its own proposal is more open and competitive. This should probably make the approval from DOJ and the job of selling the deal to YHOO shareholders easier. So my expectation for the score tomorrow -
MSFT (0) and YHOO (3).

Yahoo and Google deal?

Rav said:

May. 17, 12:35 AM

Of course in an ideal world, YHOO would prefer to continue with its merry ways and won't like to capitulate and sign a deal with GOOG. I believe that is part of reason for the resistance that they feel. That's also the reason that so far they didn't feel an urgency, especially after MSFT walked. But with Icahn breathing down his neck, Yang doesn't have the luxury of time. This would change the equation and force a deal with GOOG sooner rather than later.

Both Henry and joeblow have missed one probable reason why the deal hasn't been announced yet. Its the last and most potent bullet that YHOO has in its arsenal, to keep YHOO independent. So the timing of the deal is very important. I think they will try to time it in a way that takes the air out of Icahn's sails - probably closer to the proxy fight. Communicating with regulators to get their approval a priori, might also add to the delay.

GOOG is certainly not in a hurry to do this, since its primary interest is in keeping YHOO away from MSFT's clutches. Since MSFT walked, it made sense to go slow on this deal. But now that Icahn has added fuel to the fire, it has suddenly become urgent. That's what I mean by Icahn being the catalyst.

I don't think GOOG is in it for the money. The strategic importance of keeping YHOO independent is lot more than the financial interest. I think YHOO and GOOG can easily work out the long-term / short-term and other details of the deal, since their goals are same - to keep YHOO independent. The only tricky part is that YHOO would still have to at least pretend to make sure that it doesn't preclude or affect other future transactions.

From Bostock's letter "As we have publicly stated, our board continues to actively and expeditiously explore strategic alternatives to maximize stockholder value. None of the alternatives we are considering would preclude us from entering into a transaction with Microsoft or any other party."

Potential Outcomes

Rav said:

May. 16, 12:15 PM

Carl Icahn is nobody's tool. In fact with his opportunistic involvement he has made a tool out of YHOO and MSFT. He would just act as a catalyst to force a quick outcome. If YHOO panicks first then it would sign a deal with GOOG. Carl will make about 4-5$/share with this outcome, not a bad deal for him, for couple of weeks of work. If MSFT panicks, then they pick up YHOO at ~$35/share with Yang on board. This would be a better outcome for Icahn. In either scenerio MSFT would be a loser and YHOO and GOOG would be winners.

In the low probability case that nothing happens in next couple of months, YHOO will trade close to $25-26, MSFT remains virtually unchanged and Icahn doesn't lose anything. So its a ~free arbitrage opportunity for him.

Yahoo's value

Rav said:

May. 16, 12:55 AM

@purple haze

YHOO has a lot of potential value which hasn't been realized by current management. Its like a diamond in the rough, which can be quite expensive after it has been properly polished. MSFT is not stupid to have offered $33/share if they really believed that YHOO was worth $19. You have to remember that when MSFT made the offer YHOO had just come out of a bad quarter and all tech stocks were crashing. So 70% premium in that context is meaningless. Hell, by that logic, AAPL is trading at a 65% premium over its $118 price just a couple of months back and this is without any offer.

You really have to look at YHOO price within last couple of years. Its been mostly in the $25-30 range. Also, in last couple of years WEB2.0 has caused a price inflation in internet companies. Youtube today would at least be worth 5-7B$ as a stand alone property. Facebook is close to 10B$.

Considering all this and the fact that MSFT needs YHOO more than the other way round (scarcity value), I think the Yahoo board - (Yang included) did indulge is sincere negotiation, at least in the last couple of weeks before the deal fell through. I think the reason for deal failure is lack of commitment from MSFT side and also potential concerns about integration issues with a hostile Yahoo.

Icahn speculation

Rav said:

May. 16, 12:25 AM

I agree with JB's logic above, which implies that YHOO stock has already priced in an MSFT offer in the $33-35 range, which is the most likely range that at least MSFT would be comfortable with. So the question to speculate on is why is Icahn still interested? Perhaps he takes his 4-5$/share in profit and splits as soon as the dust settles down. There isn't much more in this unless he can convince MSFT to buy for a higher price, which seems unlikely.

I think he has grander plans than that. He is trying to use the shareholder discontent to push his stooges on the YHOO board. If he succeeds, then he would have both MSFT and GOOG by their balls. He could then make them bid against each other and auction off YHOO properties piecemeal. He can sell off Asian assets. Yang can't do this because YHOO is his baby and he is emotionally attached to see it destroyed. Icahn won't have any such qualms. With the market as hot as it is, (CNET and BEBO selling for billions) its not unreasonable to expect a hacked YHOO to fetch $35-$40/share in a competitive bidding situation if sold in a piecemeal fashion. This would also address regulatory issues dealing with mail and yahoo messenger. If this is how it plays out then MSFT would be a strategic loser and will regret not paying up a few more bucks to seal a deal and be able to compete effectively with GOOG

YHOO MSFT deal breakers

Rav said:

May. 15, 7:28 PM

Don't count Jerry and YHOO's current board out yet. They still have couple of moves in their arsenal.

First, is that YHOO-GOOG talks are still ongoing with a possible deal next week.
http://www.reuters.com/article/mergersNews/idUSN1534279620080515

The second is YHOO's response to Icahn.
http://www.marketwatch.com/news/story/complete-text-yahoos-reponse-carl/story.aspx?guid=%7BBBB659F0%2D1EE6%2D4C63%2DAB48%2DEDF7AB4AB73C%7D&siteid=yhoof

I find YHOO's version of merger talks with MSFT more credible than the version put forth by MSFT. The key issue is that MSFT never specified how they would ensure "certainty of value" and "certainty of closing" in its so called $33/offer. Mr. Ballmer's letter is silent on those details. Even in my previous comments, I mentioned that these reasons in addition to the difference in expectation on the share value ($37 v/s $33) were the deal-breakers.

I don't see how the activist shareholders can address those issues. I think the most likely outcome is that the activist shareholders would act as a catalyst and force the current YHOO BOD to take quick actions like selling off asian assets and signing deal with GOOG, in order to maintain the share value and also keep the company independent. We'll see how this turns out, but this is my strong belief in the eventual outcome. The alternative of MSFT acquiring YHOO at ~$35+ doesn't seem likely because of MSFT's unwillingness to pay that much and also potential negative effect on its own stock.

Icahn's intentions

Rav said:

May. 15, 5:25 PM

@Hey,Rav

Looks like your comment was after MSFT walked and was more of an explanation of what happened (a posteriori). If you look at the date of my comment, it was before MSFT walked (a priori). YHOO holding value and rising was an unexpected event for the street, with most folks expecting ~$20 price on YHOO. I had expected around $24 and rising from there, which it did.

In any case, congrats on making some $$ on it. I made some $ as well but didn't hold YHOO opts. till Mr. Icahn showed up, so left some for him :-).

If you look at the story in my comment earlier, I totally agree with you that Icahn is very smart. My claim is that he doesn't have any affinity to YHOO or MSFT. He'll just try to extract maximum value from this deal regardless of whether MSFT is still interested or not. In the process if YHOO loses value so be it.

If MSFT doesn't come back at around ~$35, I doubt that Jerry will agree to a deal. A protracted proxy fight is in no one's interest because then YHOO becomes a fast depreciating asset. But both MSFT and Jerry are still quite far in terms of expectations. So protracted proxy fight is likely. If Jerry feels threatened by this at some point he would sign deal with GOOG and try to divest YHOO's asian assets. He has nothing to lose by following that path. The short term activist shareholders will still make money, but it would be a big strategic loss for MSFT.

I think comparison of GM and YHOO is not fair, because YHOO is all about people and technology unlike GM. Perhaps a comparison with BEA and ORCL is more reasonable. In that case ORCL ended up paying a lot more for BEA after Icahn got involved. I'm sure MSFT would have to pay more in this case as well, because of Icahn's involvement. Most commentators at this point believe that MSFT is in a better negotiating position and should lower their offer from $33/share. I don't agree with this view.


Rav said:

May. 15, 2:00 PM

Guys, remember the story of two cats and a monkey? In this case YHOO and MSFT are the two cats trying to negotiate an impossible deal. Sniffing an opportunity, Mr. Icahn has offered to distribute the goods in a fair manner. You know how the story ends.

Mr. Icahn will extract all the value in the deal and leave a dead YHOO for MSFT to acquire. Remember that MSFT could have done the proxy fight itself, but chose not to do it because they want an alive and friendly YHOO, not a dead and hostile YHOO. Mr. Icahn is just throwing a monkey wrench which will make the deal even more expensive for MSFT and lead to loss of value on the YHOO side.

Note that YHOO is trading higher than the weekend before the deal looked like a sure thing. This implies that the market has higher expectations than what MSFT was offering back then. People are betting that either MSFT takes the bait at ~$35/share or YHOO quickly signs a long-term deal with GOOG to stay independent.

Btw, I had predicted some of this in:
http://www.alleyinsider.com/2008/4/next_move_in_the_microsoft_yahoo_battle_analysts_wall_street_and_sai_readers_place_bets
"Rav: [E]veryone is assuming that if MSFT walks, Yahoo goes under 20, with no opinions to the contrary. They don’t seem to realize that Yahoo shares now have MSFT put (similar to the Greenspan put). No one will believe that MSFT is going to walk for real and for ever. YHOO may go down 2-3 bucks, but then will attract lot of new stock buyers, because MSFT is eventually going to come back."

Now YHOO has a Icahn put in addition to MSFT put, and guess who is gonna pay the premium for those puts - MSFT

Icahn getting involved

Rav said:

May. 14, 11:07 AM

If Icahn launches a proxy battle by filing a rival slate of directors, it will immediately force current YHOO BOD to sign a deal with GOOG. YHOO may also sell off its Asian assets. If that happens YHOO will trade close to ~$30, GOOG will go up significantly and MSFT will be out of the game once and for all. The only way MSFT can pre-empt this is by offering ~$35+ per YHOO share, which seems unlikely in near future

Rav said:

May. 13, 2:45 PM

This should improve the chances of MSFT acquiring YHOO and also increase the potential cost of this transaction to ~$35+ range per YHOO share. This would be negative for MSFT stock and a big positive for YHOO. The chances of deal with GOOG, also go up, once Icahn gets involved, in case MSFT balks at the price. So its a neutral event for GOOG.

I expect MSFT to go down and YHOO to go up, and GOOG remain unchanged. As the probability of the deal improves after may 15th and before the shareholder meeting, MSFT would drop even more and YHOO would trade higher.

Hiring at Google

Rav said:

May. 13, 12:35 AM

@R-man

Talk about killing the goose that lays golden eggs! You have a perfect plan! I'm glad that the powers-be at GOOG don't think like you.

@Gordon

All those statements are very appropriate for bloated organizations like MSFT / IBM. GOOG is still quite lean considering its growth rate, revenue and profitability. They are very selective about hiring and had no hesitation letting go a significant portion of DCLK employees, at the first chance they got. Hiring smart folks and spending on R&D is a very good long-term strategy for a company like GOOG.

Latest on GOOG YHOO MSFT

Rav said:

May. 12, 2:06 PM

@K K
1) Ballmer shoots in foot with withdrawn bid. Look at the stocks - MSFT is down significantly from Jan 30th price, before bid was announced and YHOO is up about 30+% . Who is the loser here, as per Mr. Market?

2) Only the greedy shareholders are angry, and not enough of them at that, to nominate a rival slate of directors. Others have made good money riding from ~$19 to ~$28 in YHOO stock. Yang is waiting for the deadline to nominate alternate directors (may 15th) to expire and then he'll sign a deal with GOOG.

3) Agree 100% with you here. That's the reason for my point (1) above.

4) MSFT == incredible online technology.... (HAHAHA, you surely must be joking here - look at their mounting online losses) It would put a govt-subsized third-world public sector organization to shame.

5) Exactly opposite is true. If YHOO had not spent a dime on its second-rate search technology (panama technology included) and used GOOG all along, they would have grown stronger and GOOG perhaps would have remained a niche player providing backend technology to YHOO. YHOO would have ended up in a better financial condition than it is in now.

6) I don't think MSFT believes that it can get half of GOOG share with YHOO. Otherwise they would be willing to pony up a few more bucks for YHOO. You can't breed two mediocre horses and hope that the combination would be a superstar racehorse. I do agree that MSFT-YHOO combination could squeeze GOOG margins, but only if MSFT plays the unfair game of subsidizing its online business with monopoly profits from desktop products.

7) That equation would be true for any big-cap growth company. The issue is sustainability of growth and inflation during this period.

8) Ballmer indulges in wait and watch. The May 15th deadline expires without any significant event. Next week either MSFT buys YHOO for $35+ adversely affecting its own price or YHOO signs a long-term deal with GOOG, forever pouring cold water on MSFT's search ambitions.

MSFT YHOO - Deal or No Deal?

Rav said:

May. 09, 1:46 PM

If there is no hostile activity by May 15th, its more likely that YHOO will sign up a deal with GOOG, because Yang won't have to worry about his position and board seat anymore.

The conflicting signals coming from MSFT execs indicates that they are in a state of disarray and don't have any well-defined cogent strategy. This means that they are unlikely to come back to the negotiating table soon.

Rav said:
May. 09, 2:56 AM

I doubt that MSFT intentionally leaked the town hall meeting, with exclusive rights to SAI. My guess is that some MSFT employee, let's call him FSAI (friend of SAI) attending the meeting was relaying the information to SAI. When MSFT found out, they released the full transcript, so that there is no mis-interpretation in media. I think that was primarily intended for internal consumption, addressing the concerns of the MSFT rank and file, who have their substantial assets in MSFT.

I agree that at that point Ballmer was probably considering $33-36. The real issue at that point was that Yang wasn't interested and was looking for any kind of way out, even if it meant "burning furniture". Ballmer was ready for all this - justify spending so much money on acquisition, take a hit on stock, deal with the regulatory purgatory - if Yang had indicated at least once that he would agree to a friendly deal. He realized that a hostile (i.e. unfriendly) deal is simply not worth it at any price in the ~$30+ range with all the pain that it would bring and destroy value at YHOO. His letter mentions this in gory detail.

As you mentioned, in early january all tech stocks were trading well and MSFT was in mid-thirties. They had an excellent quarter, stock had good momentum and Vista still wasn't declared a failure by then. On the other hand, YHOO had a crappy quarter. So it was a perfect time to make a bid. The time to court big YHOO shareholders and go hostile was right then but they wasted precious time. Part of the problem is that they are not experienced in making these kind of big deals. Look at their failures in deal-making (GOOG in ~2003, Youtube, Doubleclick recently). I wouldn't call facebook investment a success either. You either need to be like Larry Elison or pay a high price and close the deal aggressively like Murdoch or GOOG guys. I think MSFT was trying to be penny wise and pound foolish.

The critical event in all this was GOOG closing on DCLK. I don't see anybody mentioning that. Also, a so-so quarter from MSFT didn't help matters. If MSFT had gone hostile with YHOO early on, they could have prevailed. With DCLK acquisition under the regulatory scanner, I'm sure GOOG wouldn't have dared to get cozy with YHOO and provide an escape hatch to Yang. Now they sound emboldened based on their comments today.

I think MSFT walking was really good for walksters and MSFT stock holders. I was expecting MSFT stock to pop to ~$31 and slowly drift to ~$29 over time. But damn, the stock market is smart and fast.... If MSFT had closed on the deal, it would have been lot worse for MSFT stock-holders regardless of the price. This is the reason that MSFT didn't specify the cash/stock split in their new $33 offer, as it would set expectations for potential offer in future and negatively affect stock. This was also the reason that Yang wanted some guarantees / valuation collar. Remember that the original $31 offer drifted down to $29 in couple of months. Who knows what happens to a $33 offer over a year, when the merger is approved.

At that point, YHOO was probably looking for ~$37 offer, with 75% in cash, rest in stock, with some valuation collar and substantial breakup fees if merger doesn't complete for any reason. I think they would accept $34-35 at this point, with those kind of terms. However MSFT can't afford to pay that without substantial hit to its stock. So they would hope that their MOJO returns and YHOO's MOJO goes down, before making another offer. In fact almost everyone, with few exceptions, was expecting that to happen. I think MSFT walked with that expectation as well. But alas, the market has its own ways...

I think may 15th is really critical date if MSFT wants to make a move. They probably don't realize this. After that date, GOOG and Yang would structure the deal in a way that GOOG benefits most and YHOO gets better financially. As per the terms of that deal, it wouldn't make sense for MSFT to acquire YHOO again in future. YHOO stock will trade around $30, and big shareholders won't bitch anymore. MSFT will continue its slow bleed to irrelevancy unless it can reinvent itself like IBM did during the last paradigm change.

Rav said:

May. 08, 11:59 PM

GOOG and YHOO will wait till may 15th deadline for YHOO's nomination of new directors. If this date passes without any hostile activity, then they'll complete the ad outsourcing deal after carefully considering regulatory issues, before the YHOO shareholders meeting. If MSFT or activist investors in YHOO, try to unseat Yang by nominating their own slate of directors, then Yang will sign with GOOG even sooner. GOOG will try everything that it can to dissuade YHOO from merging with MSFT. It may also increase the cost of merger with MSFT, by offering to improve YHOO's cash-flow. Today's comments by GOOG management should be seen in this context.

MSFT plan to walk from the deal has backfired based on the stock market action in MSFT and YHOO stock. Also, if they try to do something hostile or make overtures to YHOO, that will be a tremendous loss of face for them, so I don't expect them to do this by may 15th. Any deal between MSFT and YHOO with substantial cash payment in the range $33-35 will lead to a further drop of at least 5% in MSFT stock. So its unlikely that MSFT will try to come back to the table unless and until YHOO stock goes to ~$20 range, which is very unlikely in next couple of weeks, based on the action so far. Till that time they'll pretend to be not interested in YHOO and occasionally send signals of interest to keep the flame burning.

Rav said:
May. 08, 9:45 AM
Great Idea!! If MSFT pays $15-20B for a fad (Mr. Ballmer's words, not mine), then MSFT will hasten its demise. It would be even better if they buy both YHOO and facebook in all cash deals. All that cash would be good in the market and can you guess where all of that would end up?



Rav said:
May. 08, 2:07 PM
I still think GOOG and YHOO deal is quite likely. I think Yang and GOOG are "saving the bullets" now, in case they need them before the may 15th deadline for nominating new YHOO board members.

MSFT walking from the deal hasn't affected the YHOO stock much, so there is no urgency to announce the deal with GOOG.

If the big YHOO investors or MSFT try to nominate new board members for YHOO, then there will be an urgency for GOOG and YHOO to announce something. If that doesn't happen my May 15th, then they would have even more time to consider this deal and walk through the regulatory hoops. So far MSFT hasn't expressed any interest in a hostile deal and the big investors in YHOO are still doing fine in terms of their YHOO stock value, so they are less likely to do something hostile.

Market is giving more credit to Yang instead of Ballmer the way this deal got negotiated. If Yang had accepted the so called $33/share deal, which wasn't well defined, YHOO would have at most traded at $29, due to all the uncertainties and depending on the stock/cash component and valuation collar in the deal. MSFT would have traded down even more, reducing the deal value.



Rav said:
May. 07, 9:47 AM
The street is looking at the potential value of this kind of arrangement. YHOO doesn't need to realize this value all in one shot. It can be incremental. If the max revenue improvement is about $1B, it could potentially be worth about $6 per YHOO share. The increased cash flow to YHOO can be deployed in new projects that can lead to further growth. The arrangement can begin as a partial outsourcing and then depending on the outcome of that and any anti-trust issues, it could lead to further outsourcing in future.



Rav said:
May. 07, 10:13 AM
Henry, based on the historical trends, no matter what YHOO does or doesn't do, its query share is going to decline over time due to natural monopoly in search and network effects. So the choice is either leave the money on the table by poor monetization or milk the current search share and deploy the additional income in the next big thing.



Rav said:
May. 06, 2:56 PM
Guys, watch this equation: (9.31*MSFT-0.313*GOOG). That's the delta between MSFT and GOOG in B$. Its about 90B$ today but going down fast.

Based on the market action in last couple of weeks, it seems like MSFT-YHOO deal or no-deal won't have any material impact on GOOG. This delta will keep going down. The rate would be faster if MSFT acquires YHOO and slower if MSFT stays on the sidelines.

In case of walking from the deal if MSFT doesn't manage to rally, then imagine what could happen to MSFT stock if it actually ends up buying YHOO for ~$33+. I guess its the walksters worst nightmare.

When analyzing Yang's actions, nobody is talking about the nuisance value of YHOO to MSFT. I guess $33 was a fair strategic value for MSFT, but YHOO wanted another $4 of ransom (i.e. nuisance value), in order to not sign a deal with GOOG. I think that was fair, because YHOO not partnering with GOOG is definitely worth another 5B$ for MSFT.

The stock market is suggesting that MSFT is between rock and a hard place, and not YHOO as most commentators expected. YHOO is up about 37% from the 19.08$ price prior to deal announcement and MSFT is actually down.


Rav said:
May. 06, 7:43 PM
The next act of this drama is going to play out by May 15th. That is the date by which new board members for YHOO could be nominated. I think Yang, is most likely sitting on the GOOG offer to use as a backup in case either MSFT or others try something hostile before May 15th. So I don't think the YHOO-GOOG deal would get announced till then, unless YHOO stock starts tanking.

Let's face it guys. MSFT walking out has had a very minimal negative impact on YHOO. On the contrary YHOO is up about 35% from its pre-deal price of ~ $19, within is a 3-month period. That is a great return.

Even if Yang had accepted the $33 offer from MSFT and if that offer was half-stock and half-cash, YHOO would probably still be trading at 28-29, due to deal completion and regulation uncertainty. The merger would still take about a year to close. (Remember Doubleclick) MSFT would probably be trading down making the offer lower.

I see only two possible outcomes here - MSFT pays about $35 with significant cash component or YHOO signs deal with GOOG. First event would be mild positive for GOOG and second would be bigger positive. The deal below $35 with MSFT has some uncertainty, but the deal with GOOG should add about $6 worth of value to YHOO based on some estimates.

If none of those happen, then both MSFT and YHOO would become weaker players and GOOG would still benefit. I don't see a scenerio where GOOG loses. Do you?


Rav said:
May. 05, 9:23 AM
I don't understand the premise for shareholder lawsuits. Based on pre-market action, YHOO shares would end up much higher than the $19 price (on 1/31) prior to the merger announcement. Also, stock holders had a lot of time until friday to take their profits. Only the greedy ones, who were still betting on the deal closing are left holding the bag. Since the stock was trading at ~$28 on friday and not at $33 which MSFT was reportedly ready to offer, everyone was aware that there is some uncertainty that the deal may not close.

Only claim shareholders could potentially make is that YHOO BOD didn't satisfy its fiduciary responsibility. However that would be a stretch because YHOO did hire investment bankers and based on the CNBC report were quite engaged in the negotiation.


Rav said:
May. 05, 10:48 AM
Here is another way of looking at the situation today, which most people seem to have missed.

MSFT is the real loser here. Today YHOO is 25% higher than what it was on 31-Jan-08, prior to MSFT deal announcement. MSFT is down 8% from 31-Jan-08 closing price. GOOG is up about 5% since that date.

If YHOO announces a deal with GOOG, then it would look even worse for MSFT. What has MSFT achieved here, other than highlighting its precarious position in the online world compared to GOOG and getting GOOG and YHOO closer to a deal?

YHOO closing prices:
1-Feb-08 28.38
31-Jan-08 19.18

MSFT closing prices:
1-Feb-08 30.45
31-Jan-08 32.6

GOOG closing prices:
1-Feb-08 515.9
31-Jan-08 564.3


Rav said:
May. 03, 8:53 PM
Guys, those are my comments from last weeks thread. I still believe this is how it will play out in the market.

Rav said:
Apr. 26, 2:31 PM
I think MSFT goal is to acquire YHOO at <= $35 in a friendly deal. Its simply not worth that much if they have to go hostile. In fact it may not be even worth a few bucks lower, if they have to go hostile, due to all the negatives that come out of the hostile deal like uncertainty, employee churn, distraction etc. Its possible that Yahoo management may adopt a scorched earth policy if they see a hostile deal winning.

As joeblow explained above a +/- 10% is not a big deal for MSFT considering their financial condition and how desperate they are for YHOO. They have all along been trying to get a friendly deal, so I doubt they would go hostile at this point. Also I believe that Yang won't accept anything below $40 for a friendly deal, which MSFT can't afford due to the negative effect on its stock. I think the most likely outcome at the end of this weekend, would be that MSFT would pretend to walk, just to see the effect on YHOO stock. After a few weeks of this pretension, if YHOO stock goes down significantly, they will come back with a hostile $31 offer. If YHOO stock remains unchanged or goes up (I know, very few people believe in this scenerio, but its likely in my opinion, depending on market conditions), then they will complete a friendly deal with Yang in the $35 - $40 range. They would have a good justification and a stronger stock for this at that point.

Assuming this is how it plays out and MSFT walks on monday, the way to benefit from this is with a hedged options play is as follows:
1. Its stock will go up short term. Once it settles, buy Jan 09 puts on MSFT.
2. YHOO stock will react and fall down a few bucks . Once it settles, buy Jan 09 calls on YHOO.
3. Also buy GOOG Jan 09 calls.

After a few months, its likely that MSFT would close on Yahoo. In that case both (1) and (2) will make money. If that doesn't happen, then (1) and (3) will make money and cover any losses on (2). If YHOO makes a deal with GOOG to outsource its search, then all of them (1), (2) and (3) will make money.

In the worst case, if nasdaq crashes, (1) will make money probably not enough to cover losses from (2) and (3), and if nasdaq rallies big time, (2) and (3) will make enough to cover any losses from (1). At this point nasdaq crashing seems like a low probability event based on valuations


Rav said:
May. 03, 9:06 PM
Another comment that I have is that, Yang and Yahoo BOD have now boxed themselves in a corner, where the only option they have of preventing a catastrophic drop in value and share price is announcing a search outsourcing deal with GOOG ASAP. Since Yang was so steadfast in negotiating the deal with MSFT, I believe he must already have a broad agreement with GOOG in his pocket. I would not be surprised if YHOO and GOOG are negotiating the details and announce something before Mr. Market opens on monday.

If this plays out as I expect, any guesses on what the GOOG open would be on monday?

Victor - any ideas?

disclaimer: long on GOOG, no positions on MSFT/YHOO


Rav said:
May. 02, 1:45 AM
I’m sick of all those comments which assume that YHOO will fall down hard, if MSFT walks away. If MSFT walks they will be the only losers. YHOO will immediately announce a deal with GOOG and regain whatever value it loses. It is really the ace of trumps in its hand.

I’m sure the game theorists at GOOG have analyzed all possible scenerios and will structure the YHOO-GOOG deal in such a way that any anti-trust concerns would be addressed and dealt with in advance.

Based on GOOG’s success in completing DCLK acquisition and opening up C-block wireless by bidding, I have confidence that GOOG will come out a big winner from this imbroglio.

If MSFT doesn’t bid to win a friendly YHOO deal, its internet dreams are toast and if it does bid to win ($37+), then its stock will bleed. A short-term bleed might be acceptable by shareholders, if it leads to long-term growth. I would like to add that in internet space, "time is of essence". Its not a good place to nickel and dime. MSFT should learn from GOOG's DCLK bid and be ready to pay big bucks, if they really want the deal to close.

People who suggest that they go hostile are either wall-street types who don’t understand how innovation works in silicon valley or are short-term YHOO buyers hoping to make a quick buck. Remember that MSFT is bidding for the hearts, minds and brains of YHOO, not just the physical assets or the shell of the company.

Another possibility that I haven’t seen mentioned anywhere, in case of a hostile MSFT bid is that the current YHOO management may sell off its Asian assets and sell the remaining assets individually at premium prices, without any anti-trust issues. This would probably be a last resort, and may happen only if the current YHOO BOD is on the verge of losing shareholder vote. This is another thing for MSFT to consider if they plan on going hostile.