GOOG YHOO MSFT

Icahn-Yang partnership

2008-08-06T11:04:00.000-07:00

Rav (URL) said:

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.

Future of YHOO

2008-08-04T21:02:00.001-07:00

Rav (URL) said:

Aug. 05, 12:01 AM

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).

Another letter from Yang

2008-07-17T04:42:00.000-07:00

Rav (URL) said:

Jul. 17, 7:40 AM

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.

http://www.sec.gov/Archives/edgar/data/1011006/000095013408012864/f41908a9defa14a.htm

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.

Three blind men and an Elephant

2008-07-14T17:08:00.001-07:00

Rav (URL) said:

Jul. 14, 8:06 PM

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

2008-07-14T10:05:00.001-07:00

Rav (URL) said:

Jul. 14, 1:04 PM

@Fernando

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

2008-07-14T09:43:00.001-07:00

Rav (URL) said:

Jul. 14, 12:40 PM

@Henry

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

2008-07-14T09:18:00.001-07:00

Rav (URL) said:

Jul. 14, 12:16 PM

@Fernando

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

2008-07-14T07:50:00.001-07:00

Rav (URL) said:

Jul. 14, 10:50 AM

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.

http://www.sec.gov/Archives/edgar/data/921669/000092847508000260/dfan14a071408.txt

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.

Latest maneuver from MSFT

2008-07-13T11:32:00.001-07:00

Rav (URL) said:

Jul. 13, 2:32 PM

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.

Who is inconsistent - YHOO or MSFT?

2008-07-10T16:12:00.001-07:00

Rav (URL) said:

Jul. 10, 7:11 PM

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

2008-07-10T15:23:00.001-07:00

Rav (URL) said:

Jul. 10, 6:23 PM

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.

Price of YHOO

2008-07-09T22:34:00.000-07:00

Rav (URL) said:

Jul. 10, 1:32 AM

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

2008-07-09T13:26:00.001-07:00

Rav (URL) said:

Jul. 09, 4:24 PM

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

2008-07-09T06:35:00.000-07:00

Rav (URL) said:

Jul. 09, 9:35 AM

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.

Trading YHOO

2008-07-08T06:49:00.001-07:00

Rav (URL) said:

Jul. 08, 9:48 AM

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

2008-07-08T03:23:00.001-07:00

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
Algorithm:

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.

My comment yesterday

2008-07-02T06:17:00.000-07:00

Rav (URL) said:

Jul. 02, 9:16 AM

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.
http://www.techcrunch.com/2008/06/13/microsofts-letter-to-the-troops-our-yahoo-offer-was-better/
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.
http://finance.yahoo.com/echarts?s=MSFT#chart5:symbol=msft;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. "

Time for a new bid from MSFT?

2008-07-01T09:26:00.001-07:00

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.
http://www.techcrunch.com/2008/06/13/microsofts-letter-to-the-troops-our-yahoo-offer-was-better/
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.
http://finance.yahoo.com/echarts?s=MSFT#chart5:symbol=msft;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.

This is great!

2008-06-24T10:39:00.001-07:00

Rav said:

Jun. 24, 1:38 PM

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

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.

More predictions

2008-06-16T13:37:00.000-07:00

Rav said:

Jun. 16, 4:36 PM

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..

http://googyhoo.blogspot.com/2008/06/icahn-playing-good-cop-bad-cop.html

@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..

Here's an idea for AAPL to consider

2008-06-13T22:14:00.001-07:00

Rav said:

Jun. 14, 1:13 AM

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

2008-06-13T16:52:00.001-07:00

Rav said:

Jun. 13, 7:47 PM

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?

http://www.techcrunch.com/2008/06/13/microsofts-letter-to-the-troops-our-yahoo-offer-was-better/

http://www.techcrunch.com/2008/06/13/google-drives-towards-microsoft-and-adobe-w

An analogy

2008-06-13T13:10:00.001-07:00

Rav said:

Jun. 13, 4:10 PM

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?

2008-06-13T12:36:00.000-07:00

Rav said:

Jun. 13, 3:36 PM

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

2008-06-13T08:42:00.000-07:00

Rav said:

Jun. 13, 11:41 AM

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:
http://paul.kedrosky.com/archives/2008/06/12/microsoft_is_do_1.html

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.

What's up with MSFT?

2008-06-12T14:32:00.000-07:00

Rav said:

Jun. 12, 5:31 PM

@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!

2008-06-12T13:50:00.001-07:00

Rav said:

Jun. 12, 4:49 PM

@temporal

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

2008-06-12T13:43:00.001-07:00

Rav said:

Jun. 12, 4:42 PM

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?

2008-06-12T12:56:00.001-07:00

Rav said:

Jun. 12, 3:54 PM

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

2008-06-12T12:30:00.000-07:00

Rav said:

Jun. 12, 3:29 PM

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

Long live the goog-yhoo monopoly!!!

http://googyhoo.blogspot.com

GOOG + YAHOO ? Really??

2008-06-12T11:09:00.001-07:00

Rav said:

Jun. 12, 2:08 PM

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

http://www.techcrunch.com/2008/06/12/googleyahoo-announcement-at-130-this-afternoon/

Ready for the proxy fight?

2008-06-12T11:00:00.000-07:00

Rav said:

Jun. 12, 1:58 PM

@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?

2008-06-12T07:48:00.000-07:00

Rav said:

Jun. 12, 10:41 AM

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:
http://googyhoo.blogspot.com/2008/06/what-icahn-really-wants.html
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.

What Icahn really wants

2008-06-11T09:12:00.000-07:00

Rav said:

Jun. 11, 12:10 PM

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.
http://googyhoo.blogspot.com/2008/06/heading-to-delaware-court.html

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 ASK.com 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.

Icahn playing good cop / bad cop ?

2008-06-06T09:37:00.000-07:00

Rav said:

Jun. 06, 12:34 PM

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.

What Icahn may try to do

2008-06-05T11:35:00.000-07:00

Rav said:

Jun. 05, 2:35 PM

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?

2008-06-05T10:38:00.001-07:00

Rav said:

Jun. 05, 1:36 PM

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.

Icahn's dilemma

2008-06-04T17:06:00.001-07:00

Rav said:

Jun. 04, 8:05 PM

http://news.cnet.com/8301-10784_3-9958628-7.html
http://news.cnet.com/8301-10784_3-9959975-7.html

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

2008-06-04T12:03:00.001-07:00

Rav said:

Jun. 04, 3:02 PM

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

2008-06-04T11:36:00.001-07:00

Rav said:

Jun. 04, 2:35 PM

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

http://www.sec.gov/Archives/edgar/data/921669/000092847508000200/0000928475-08-000200.txt

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

Heading to the Delaware Court?

2008-06-03T17:07:00.001-07:00

Rav said:

Jun. 03, 8:05 PM

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.

http://www.sec.gov/Archives/edgar/data/1011006/000089161808000295/f37157r1prer14a.htm#104

"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

2008-06-03T13:20:00.000-07:00

Rav said:

Jun. 03, 4:20 PM

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.

The equation

2008-06-02T14:09:00.001-07:00

Rav said:

Jun. 02, 5:07 PM

@jay

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

2008-06-02T14:08:00.000-07:00

Rav said:

Jun. 02, 5:02 PM

@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?

2008-06-02T12:19:00.000-07:00

Rav said:

Jun. 02, 3:18 PM

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.

Thoughts based on Yang and Ballmer interviews at AllThingsD

2008-05-28T23:42:00.001-07:00

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?

2008-05-25T15:10:00.001-07:00

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?

2008-05-23T11:24:00.001-07:00

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?

2008-05-23T08:07:00.001-07:00

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

2008-05-22T16:57:00.001-07:00

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

2008-05-22T16:47:00.001-07:00

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

2008-05-22T14:10:00.001-07:00

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?

2008-05-21T16:16:00.001-07:00

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

2008-05-21T14:12:00.000-07:00

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?

2008-05-21T12:41:00.001-07:00

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?

2008-05-21T09:59:00.000-07:00

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

2008-05-21T09:32:00.000-07:00

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?

2008-05-21T07:16:00.001-07:00

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

2008-05-21T06:31:00.000-07:00

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

2008-05-20T20:24:00.001-07:00

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

2008-05-19T20:58:00.001-07:00

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

2008-05-19T16:24:00.000-07:00

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

2008-05-18T22:40:00.000-07:00

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?

2008-05-18T21:18:00.001-07:00

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

2008-05-18T20:54:00.001-07:00

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?

2008-05-16T21:37:00.001-07:00

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

2008-05-16T09:16:00.001-07:00

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

2008-05-15T22:00:00.001-07:00

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

2008-05-15T21:25:00.000-07:00

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

2008-05-15T16:30:00.001-07:00

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

2008-05-15T11:01:00.000-07:00

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

2008-05-13T11:46:00.001-07:00

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

2008-05-12T21:35:00.000-07:00

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

2008-05-12T11:06:00.000-07:00

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?

2008-05-09T00:13:00.000-07:00

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.