Monday, May 19, 2008

Likely outcomes

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

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