Wednesday, May 28, 2008
Sunday, May 25, 2008
Deal or Bust?
Rav said:
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.
Icahn and other corporate raiders are just opportunists who see an ideal arbitrage opportunity with very limited downside. They must really believe that YHOO's potential value is in the $30-35, regardless of whether MSFT buys them or they sign an ad deal with GOOG. That's the reason that they have bought substantial stakes. The strongest justification is that YHOO is the only strategic imperative for MSFT for getting the scale that they desperately need. So even if they walk again, it doesn't preclude them from returning to the table again, which should support YHOO stock in that scenario. Also Icahn bought options dated 2010, which means he is not concerned about the timing of the deal and is prepared to hold longer term if there is a delay in the resolution. Another reason might be that he doesn't believe a deal is going to get done within couple of months, and so decided to go longer term.
I also agree with the "weekend or bust" aspect of the current status of the deal because the sooner YHOO signs up with GOOG, sooner they can derive the financial benefits, which will improve their position in the proxy fight, which is likely to be after the earnings report for the current quarter. They are perhaps waiting for the categorical statement from MSFT, that they have "REALLY" moved on and are not interested in any kind of deal with YHOO. If MSFT issues this kind of statement soon, then YHOO will immediately sign up with GOOG and support its stock. If MSFT doesn't issue such a statement, then the status quo may continue for some more time as there is no urgency for YHOO to sign up with GOOG. However considering the beating that MSFT stock has taken since the day this deal was announced in end of Jan, and it seems to be getting worse, the pressure is on MSFT to make a final statement on the deal and prevent any further drop in its value. I'm sure the walksters are hoping for this as well. The stock market hates uncertainty more than anything else.
The odds above seem about right, except for the price I think. I expect the price to be around ~$35 with a significant component of value guarantee, if indeed MSFT and YHOO agree to a full acquisition. I guess its obvious that this is the worst nightmare for the walksters. It may also be perceived as negative by some of the trigger-happy GOOGsters, although long-term it would be great for GOOG because MSFT and YHOO together would sink much faster in the online waters due to the additional momentum and weight. The deal would be accretive in that sense. :-)
I never put any faith in MSFT's attempts to do a partial deal with YHOO, because if it was so difficult to come to terms on a full acquisition, imagine the difficulty of doing a partial deal. I think this was just a delaying tactic by MSFT to buy some more time, no matter what the sources say. Its much easier to do partial deals with willing partners. That's the reason its more likely with GOOG.
Friday, May 23, 2008
Can MSFT live-cashback win?
Rav said:
@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.
Excellent post. Very persuasive arguments that no one else is writing or talking about in the mainstream. I think MSFT is so desperate for action on live.com, that I won't be surprised if they offer a matching program where they add to the cashback offered by advertisers, from their own pockets. Otherwise there is no value added, because there is nothing that stops the lowest bidder from offering the same deal on google. The additional advertising cost can be easily made up by the higher volume due to more eyeballs on google.
One thing you missed is that the cashback will be paid after 60-days, which reduces the value of that for most buyers looking for instant gratification. There is no justification for this delay, unless there is an intention to reject some of the legitimate cashbacks by the sellers, which would be a customer service and PR nightmare. Why can't they make it an instant rebate?
In the off-line world, sometimes manufacturers and stores offer significant mail-in-rebates because not 100% of those are claimed. Here they can't do this because there are no hoops to go through and presumably most folks will get the rebates. That's one less incentive for sellers to offer significant rebates.
History is not on MSFT's side on this one - A9 by amazon, iwon, ebates, even MSFT couple of years back, have all failed trying to do this.
I believe that GOOG will win the CPA wars with its better and more granular technology compared to MSFT's live cashback model. If I have to compare - GOOG's model is more like Priceline and MSFT 's offering is similar to hotwire/expedia/kayak. Ultimately a sustainable model like Priceline wins and has no credible competitors. A model like hotwire/orbitz/expedia/kayak which anyone can easily replicate is not very sustainable.
Last chance for MSFT?
Rav said:
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.
If they give up and let GOOG sign a long-term deal with YHOO, the MSFT stock may get a temporary bump, but it would be a strategic blunder long term, because they would never be able to get the scale to compete effectively with GOOG. Its articulated very well in Ballmer's "walk" letter and also the transcript of the town hall meeting.
I think YHOO BOD is now is a much stronger negotiating position with the shareholder's meeting pushed out after the next earnings call. Don't believe all the rumors and innuendo about YHOO board coming out in the press. They are most likely stories planted by MSFT. YHOO hasn't even acknowledged that they are specifically talking with MSFT about breaking up YHOO. The only thing coming out of YHOO is the news about imminent deal with GOOG. This is probably the last weekend for MSFT to put up (i.e. pay up ~$35+ on YHOO's terms) or shut up, because YHOO would want the revenue bump from GOOG deal ASAP, so that it is in a good position to win the proxy fight in end of July.
Thursday, May 22, 2008
Yahoo's gameplan
Rav said:
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.
Sometime next week announce a deal with GOOG. The effect of this deal to the bottom-line will show up in the next YHOO earnings call in third week of July. If YHOO shows significant and promising improvement in both top-line and bottom-line, then it will be very hard for Icahn to win the proxy battle. The shareholder meeting would be in a few days after the earnings announcement.
This move implies that current YHOO board is determined to fight it out at the shareholders meeting. So the chances of any kind of deal with MSFT have gone down, unless MSFT pays up ~$35+, which is unlikely.
Icahn and YHOO sec filings
Rav said:
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
Icahn's filing has details on all his recent YHOO transactions - interesting to read.
yahoo's filing:
http://www.sec.gov/Archives/edgar/data/1011006/000089161808000285/f37157prpre14a.htm
Icahn's filing:
http://www.sec.gov/Archives/edgar/data/921669/000092847508000191/0000928475-08-000191.txt
Google's approach to CPA
Rav said:
I think this is a lot smarter and granular way of going about CPA, rather than the 60-day cashback that MSFT is offering.
Wednesday, May 21, 2008
Live cashback - GOOG killer or AMZN killer?
Rav said:
Also, the only items that AMZN would now be able to sell easily are those that are priced lower than live cashback. That should kill their margins.
One potential issue here could be the reliability of the merchant, but I don't see any b&m retailer or etailer winning here. It sounds like a "race to the bottom" in terms of pricing for those guys.
Just as travel sites like kayak.com are killing the traditional airlines ticketing model and travel agencies, this would have a negative effect on the overall retailing business.
How much of a dent it make to GOOG is debatable, because the value proposition there is not just cost but overall quality of results. And a significant component of the clicks that GOOG gets are from folks that are not specifically looking to buy, but click on an impulse and some of which gets converted to actual sale. So until MSFT succeeds in getting the eyeballs, its not going to have any material effect on GOOG. This explains why MSFT is anxious to get more eyeballs.
More on Live cashback
Rav said:
The feature itself is not new. There are tons of sites which already offer price comparison and rebates. The price comparison sites will be fine, because they can just combine their results with the results from live, and tell the consumer about the best deal, which in some cases may end up on live.
Its bad for the advertisers because it will squeeze their margins if they have to foot the bill for the cashback. Its fine for the advertisers as long as MSFT provides the service and foots the cashback bill. The moment this stops, the advertisers will bail. Footing the bill forever is not sustainable for MSFT. Its already losing billions on its online efforts and spending on cashback would make the situation even worse than it already is. Its bad business because the amount of money MSFT loses would be directly proportional to the growth in its search share. Google didn't grow big by losing money dotcom style. In fact they were consistently profitable throughout their brief history.
How would GOOG respond?
Rav said:
1. Be more determined and aggressively go after the YHOO ad outsourcing deal. MSFT has made it obvious by this move, that their real intention behind getting the scale on internet search is to kill the market, not milk it. This is what GOOG guys are afraid of. They don't mind competition as long as its fair and based on merits and not on subsidy. This is also the reason that Yang is reluctant to sell out to MSFT.
2. Undercut MSFT with Google apps. I wouldn't be surprised if they soon provide a fully functional offline office applications package, without requiring gears and internet connection.
3. Go after the WIN XP and Vista markets. I think with Vista getting bad reputation and the significance of OS waning, now may be a good time for Google to get into this market as well. There is a lot of demand for low cost desktops all over the world. This can be their opportunity to hurt MSFT's cash cow. They already have some experience in the OS domain with their work on android and also have a strong brand.
Who suffers?
Rav said:
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.
GOOG may suffer from a perception that this may change the game. But reality is that their business model is quite adaptive because the advertisers bid against each other. If a few advertisers leave, there are a lot more, who are currently losing the bids, that can take their place. Meanwhile if you are looking to buy that fancy camera, here's your chance to go live. Take advantage while it lasts. Reminds me of the webvan and pets.com days.
Lame humor attempt
Rav said:
In related news:
- MSFT plans to introduce live-pal to compete with paypal. People will get paid to use this service.
- MSFT plans to introduce live-list to compete with craigslist. People will get paid to post ads there.
- MSFT plans to introduce live-bay to compete with ebay. People will get paid to put up auctions there.
Where is all this money going to come from you ask? MSFT is introducing a super-duper-ultra-plush-ultimate-premier version of vista for $499.99, which would be a standard requirement for all future PC buyers that still want to buy XP.
Rearranging the deck chairs on the Titanic?
Rav said:
http://blog.searchenginewatch.com/blog/051227-121401
Somebody wisely said, "Those who forget history are doomed to repeat it". Based on failed past attempts, it sounds more and more like an attempt to re-arrange the deck chairs on the Titanic, rather than some truly innovative and disruptive technology. Perhaps folks at MSFT working on this got confused about what disruptive technology means and instead took it literally and decided to disrupt their own already failing model.
MSFT attempts to bribe searchers
Rav said:
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
Tuesday, May 20, 2008
Deal or No Deal
Rav said:
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.
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.
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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.