Much Ado About Yahoo – Part 1
This Tuesday was special and happens once every four years. They call it Super Tuesday, perhaps because of the super long lines and super confusion that takes place as people in 24 states cast their vote on a smorgasbord of local issues and referendums along with the all-important primary election vote where they help determine their political party’s candidate for presidency. Only once in four years, do you see candidates fighting it out trying to be number one, looking for ways to combine with another, with others who once had aspirations of being number one having to concede to either second place or not at all. Were this four years ago, you’d have a very different picture as only one side would be jockeying, looking to find a way to knock out the incumbent. Because of term limits, the candidates have no incumbent with which to contend. The same doesn’t hold true with business. A company that gets to the top has the right to stay at the top for as long as they can, barring of course, any monopolistic behavior. Once a company gets to the top, especially in the case of Google whose stranglehold on the flow of Internet advertising revenues has put them on the path of a monopoly, knocking them from their perch takes big bets and bold moves. Thus, in the online space, February 1st, might go down as Super Friday, as on that day news broke that Microsoft launched an unsolicited bid for the former number one of the Internet, Yahoo. This makes Google’s billion dollar acquisition of YouTube and multi-billion dollar acquisition of DoubleClick seem almost manageable (valuations in the former excluded). However, it might not compare to, and for their sake let’s hope it doesn’t mirror the outcome of, AOL’s purchase of Time Warner. Now, we’re less than a week into the process, one that will take many months if not longer to transpire, but already volumes have been written. Here’s how it has unfolded.
February 1
As Henry Blodget reports, "At 6:30am EST, Microsoft offered to buy Yahoo for $44.6 billion in cash and stock, or $31 per share. This is a 62 percent premium to Yahoo’s closing stock price Thursday. The offer is half cash / half stock, with each Yahoo shareholder choosing which consideration they want to receive." He also states that, "This is a brilliant move by Microsoft–a big premium dangled in front of battered Yahoo shareholders, but a price that would have seemed absurdly low as recently as six months ago." Also from Blodget, "Microsoft expects the deal to yield $1 billion in cost synergies. Microsoft’s Internet division is losing about $1 billion a year, so this suggests the combined entity would be profitable (thank goodness–and a rarity for Microsoft)." This marks the second year in a row that Microsoft has made a hefty acquisition in the digital media space, offering a similar premium for aQuantive in 2007. Combined, the two would have just under 30% search market share, a little more than half of Google’s almost sixty-percent as MediaPost reports.
Fortune reports on AOL saying "Two years ago, AOL was the belle of the Internet ball as its owner, Time Warner, entertained teams of suitors hoping to cozy up to the once-dominant Web portal." Now, analysts and insiders at rival firms see no option but for the site to sell. And, according to the article, "Part of the reason Time Warner did not sell two years ago — when Microsoft’s offer valued it at $18 billion, according to one person familiar with the proceedings — was the hope that by hanging in it could be worth substantially more." While not a key player in the Microsoft-Yahoo deal, we could see someone come in and buy it while Yahoo continues to weight its options.
February 2
Rob Hof of Business Week reports on "Yahoo’s Joyful, Difficult Journey." Hof describes Yahoo’s tale as "an object lesson in how easily a tech company can lose its way in the industry’s treacherous rapids." And given that the company has found itself almost stuck in a high growth industry showing numbers more reminiscent of a fully mature industry, how else might it provide a 62% lift on its shares other than via an acquisition? Partnering with Google on search doesn’t make for a particularly appealing option, not for the industry as a whole certainly. As Rob outlines, Yahoo lost its technology ways, and despite some solid acquisitions, e.g. Overture and Inktomi, it focused inward or on Google and not on the next innovation. He says, "the quintessential Web 1.0 company failed to make the transition to Web 2.0, which involves creating services that tap the talents and efforts of users themselves: the volunteer-written encyclopedia Wikipedia, video-sharing sites like YouTube," and acting on an interest in MySpace or Facebook.
February 3
Back to Blodget who, had he written email subject lines could have increased open rates quite significantly as exemplified by his piece 72 hours later titled, "Why The Yahoo-Microsoft Deal Will Be A Disaster." Not one to just sit back and enjoy the cleverness of a statement he provides three reasons, "Pre-Deal Purgatory" – the year long waiting period before the deal closes, in which much will change but not as much will change at either Yahoo or Microsoft as they look to keep the deal on track. Second he describes as something akin to second fiddle syndrome. The Internet division will take a back seat to the cash cow businesses of Office and Windows. In a sense, they might have taken Yahoo off the market to minimize the risk Internet plays have on its truly core businesses. The third factor involves the number of wars Microsoft will fight at any given time competing with everyone from SAP, Oracle, to Sony, Apple, Nintendo, not to mention Comcast, Time Warner, AT&T, along with well, Google.
Three days in to the news, and we hear that it will be difficult, time consuming, and a disaster. How will Microsoft pay for it, will other bidders emerge, and what does it mean for the ad space as a whole? Continue the journey in Part 2
