Outsourcing Search To Google Will Save Yahoo How?
A wave of joy washed through the Yahoo faithful this morning: Google had called! Yahoo would outsource search to Google in exchange for a pile of cash! Yahoo was saved!
As Yahoo shareholders and fans, we'd be glad if Yahoo were saved--or at least were able to extract a far fatter take-out price--but we're missing something here.
Saul Hansell at the Times runs some numbers and estimates that, based on Ask's $3.5 billion outsourced search monetization deal with Google, Yahoo might be able to command some $40 billion in Google payments over five years. That seems like a preposterously huge number to us--Microsoft is about to buy the whole company for only 10% more than that--but let's say Saul's right and Google is willing to help save Yahoo by writing a check for, say, $10 billion up front.
What happens then?
One possibility is that Yahoo bribes its existing shareholders into blocking the Microsoft deal by paying a massive one-time dividend. That would nice for existing shareholders--and might shut them up for a few minutes--but once the money was gone, it would be gone--and the stock would drop accordingly. Also, since Yahoo will simply have received an upfront payment of future revenue, today's shareholders would have been bought off with cash that, by all rights, should have belonged to future shareholders (not the most effective means of permanently raising your stock price).
Another possibility is that "there would be a pot of money that could help finance a bid for Yahoo by a private equity firm or a media company." The theory here, we guess, is that a potential private equity buyer would immediately be able to pay off $10 billion of the debt it took on to buy Yahoo by swiping the $10 billion now sitting in the company's bank account (or, alternatively, pay itself a $10 billion dividend). Of course, since the market usually doesn't ignore $10 billion cash piles sitting on balance sheets, the private equity firm would likely have to increase its bid price for Yahoo by about $10 billion prior to taking it over. This would be nice for Yahoo's current shareholders, but it probably wouldn't encourage bids from private equity firms, who would just have to come up with an additional $10 billion of financing (and who, in any case, would just be taking an advance on future cash flow).
The most compelling possibility, presumably, is that Yahoo could take that $10 billion and use it to buy back its own stock, thus shrinking the share base and driving the rest of the shares skyward. The trouble with this plan is that Microsoft's bid has already driven the stock skyward, so the shares are 48% more expensive than they were on Friday. So Yahoo would presumably have to commit to using the $10 billion to buy back stock in the future, once Microsoft walked away and the shares cratered again. And it would have to hope that, once it had done this, the stock soared--or else Microsoft would just come right back and make another offer again.
Bottom line: If Yahoo concludes that the best way to maximize future cash flows is to outsource search to Google, then it should outsource search to Google. The idea that this move will somehow save Yahoo from Microsoft seems half-baked.
(Saul, by the way, thinks outsourcing search to Google is a terrible idea, and he makes a lot of good points...)
As Yahoo shareholders and fans, we'd be glad if Yahoo were saved--or at least were able to extract a far fatter take-out price--but we're missing something here.
Saul Hansell at the Times runs some numbers and estimates that, based on Ask's $3.5 billion outsourced search monetization deal with Google, Yahoo might be able to command some $40 billion in Google payments over five years. That seems like a preposterously huge number to us--Microsoft is about to buy the whole company for only 10% more than that--but let's say Saul's right and Google is willing to help save Yahoo by writing a check for, say, $10 billion up front.
What happens then?
One possibility is that Yahoo bribes its existing shareholders into blocking the Microsoft deal by paying a massive one-time dividend. That would nice for existing shareholders--and might shut them up for a few minutes--but once the money was gone, it would be gone--and the stock would drop accordingly. Also, since Yahoo will simply have received an upfront payment of future revenue, today's shareholders would have been bought off with cash that, by all rights, should have belonged to future shareholders (not the most effective means of permanently raising your stock price).
Another possibility is that "there would be a pot of money that could help finance a bid for Yahoo by a private equity firm or a media company." The theory here, we guess, is that a potential private equity buyer would immediately be able to pay off $10 billion of the debt it took on to buy Yahoo by swiping the $10 billion now sitting in the company's bank account (or, alternatively, pay itself a $10 billion dividend). Of course, since the market usually doesn't ignore $10 billion cash piles sitting on balance sheets, the private equity firm would likely have to increase its bid price for Yahoo by about $10 billion prior to taking it over. This would be nice for Yahoo's current shareholders, but it probably wouldn't encourage bids from private equity firms, who would just have to come up with an additional $10 billion of financing (and who, in any case, would just be taking an advance on future cash flow).
The most compelling possibility, presumably, is that Yahoo could take that $10 billion and use it to buy back its own stock, thus shrinking the share base and driving the rest of the shares skyward. The trouble with this plan is that Microsoft's bid has already driven the stock skyward, so the shares are 48% more expensive than they were on Friday. So Yahoo would presumably have to commit to using the $10 billion to buy back stock in the future, once Microsoft walked away and the shares cratered again. And it would have to hope that, once it had done this, the stock soared--or else Microsoft would just come right back and make another offer again.
Bottom line: If Yahoo concludes that the best way to maximize future cash flows is to outsource search to Google, then it should outsource search to Google. The idea that this move will somehow save Yahoo from Microsoft seems half-baked.
(Saul, by the way, thinks outsourcing search to Google is a terrible idea, and he makes a lot of good points...)
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I do not give the buyback option much weight.
"Yahoo, the largest site on the internet"
It is only six months to a year away before Yahoo is number two. Yahoo is the new AOL.
It's a shame that Yahoo can't do a relatively simple job of monetizing its own site or its publishers site (Panama not out of beta yet) despite having all the resources in the world to do so. The earliest Adsense team had fewer than a dozen people. Wake up guys, this is not rocket science.
I agree that it would be a sad thing for Yahoo to do what it clearly thinks is a poor decision in the long run in dropping Panama and going with Google. I could see them thinking about it as a lesser of two evils sort of decision if they think the Microsoft deal is bad. At the very least, they could use it as a bargaining chip to get a higher price out of MS.
I also don't understand the creative financing deals that people allude to. It would be interesting to see them explained with details about why they would be better.
If the NPV of the business is permanently higher because of a Google outsourcing, then Yahoo should have made it already (and Microsoft might not object to paying more). But a lot of folks seem to be talking about it as a source of financing for an alternative deal, which is the part I don't understand.
All else being equal, if a co buys back half its stock, the rest of the shares should double (excluding the impact of the loss of the cash). Obviously, in real world, you can't eliminate loss of cash, but if Yahoo thinks $20 is a gross undervaluation of the business (especially with a new Google deal), then using the upfront payment to buy stock would make sense.
Oh, that's right. Maybe I read it wrong. Also, I got a whole bunch of people reading SAI at work. They resisted at first because "it's not in the valley", but after having giving it a shot, they've become loyal readers. ;)
B
Financially, the Google deal would just boost Yahoo's profits, and thus its share price. The question is then if Microsoft is willing to by Yahoo for $40 a share, or whatever the new number is.
Also, a stock buyback does nothing to change share price, so I don't think I understand your last argument.
I was referring to search monetization, not search itself. Post should have been more clear.
(That's accurate, correct?)