Time To Change Microsoft - Yahoo (MSFT/YHOO), Here's a Better Deal

Except for short-term Yahoo shareholders, the Microsoft deal is not going swimmingly:

• Yahoo is desperately casting around for any escape route,
• Microsoft shareholders are storming off in disgust,
  
• Google is firing up a Washington lobbying army to paralyze both companies,
• Yahoos and Microsofties have stopped working and started sending out resumes
  
• Barry Diller is celebrating a couple of years of deal purgatory,
• Microsoft's plunging stock price is reducing the value of the bid (now down to about $29 and counting)
• Microsoft will either have to take on more debt or more dilution--or Yahoo will have to take less money.
  
• Many analysts (including us) think the deal would be a disaster.

So what can be done? A much better Yahoo-Microsoft deal.

Last Saturday, we recommended that Jerry Yang fly up to Redmond to pitch a different deal to Steve--one in which the company's assets are combined in a stand-alone company. For several reasons, this is still a vastly better alternative for all involved, including Microsoft.

First, a reminder of why a straight Microsoft-Yahoo takeover would be a disaster:

• At least a year of deal purgatory (which has already set in. See Jerry's notes to the troops pleading that they keep working, Yahoo and Microsoft resumes hitting the street, Yahoo's distracted management team, Google's lobbying engine, etc.)
• Microsoft is already fighting too many wars.  No company can do everything, and Microsoft is already competing with IBM, Oracle, and the emerging SaaS industry on one side, Apple, Sony, RIM, etc, on another, and Google, Time Warner, et al on a third.
• At Microsoft, the Internet will always play second fiddle to the Windows and Office cash cows. At Google, every idea that will disrupt Microsoft is rushed into production. At Microsoft, every such idea will be buried in politics and bureaucracy.  This will make it very hard for Microsoft to attract and retain the best talent and for the Internet company to succeed.
  
• No separate currency, no stock options, no clear brand/strategy, less focus, nearly 100,000 employees, culture clash, different types of analysts/investors, etc.

So, what's the answer? Jerry and Steve hammer out a deal in which Microsoft trades its Internet division plus $10-$15 billion of cash for half of a stand-alone Yahoo (the exact percentage, board seats, etc. depending on the amount of cash).  Steve can be chairman. The new board can agree on the management team.

Why this proposal is much better than the current one:

• Microsoft and Yahoo still get to combine forces against Google
• The stand-alone company can build its own identity, culture, strategy
• The stand-alone company can issue stock options, make acquisitions, and compete with Microsoft (which it will almost certainly have to do to succeed)
• Microsoft can continue to focus on its core mission--software.
• Microsoft's shareholders will benefit from the New-Yahoo upside (and have a hedge against the core business)
• The deal can be done immediately, with no purgatory.
• No tax hit for long-term Yahoo shareholders.
• No dilution to Microsoft shareholders.
• Yahoo can be fixed without being destroyed.
  
• Easier for the stand-alone company to acquire the wreckage of AOL

For this deal to happen, Steve needs to be persuaded that it is not in Microsoft's interests to try to do everything under one roof, that approaching the Internet as an extension of a software business is not a winning strategy (as Microsoft has demonstrated for the past 13 years), and that there are more ways to create shareholder value than owning businesses 100% outright. Microsoft's shareholders have already cast their votes, knocking Microsoft's stock down more than 10% since the deal was announced. The rest of the pitch is going to have to come from Jerry.

See Also:
Microsoft's Bid for Yahoo Down to $29
A Yahoo White Knight Emerges! Microsoft's Unhappy Shareholders
Why the Yahoo-Microsoft Deal Will Be a Disaster
Dear Jerry and Steve...Here's the Answer