And Now For Microsoft's Yahoo Alternatives... (MSFT /YHOO)
Team Yahoo has done an excellent job of conjuring up some hypothetical "alternatives" to hitting Microsoft's bid, including
- Google-search-outsourcing (just a business deal),
- AOL merger (good idea but not an alternative), and
- MySpace equity swap (an alternative, but also bad idea).
We put the odds that any of these will emerge as a credible alternative plan at less than 10%.
So, now that we Yahoo shareholders have concluded that it's only a matter of time before Microsoft gives us the $35 we're waiting for, it's time to talk about Microsoft's alternatives.
(Why does Microsoft need alternatives? Because Team Microsoft wants some negotiating leverage, too. Also, more importantly, because many of Microsoft's shareholders hate this deal--which they should, because it's going to be a disaster. One Microsoft shareholder wrote a letter to CFO Chris Liddell yesterday lambasting him for even considering raising the Yahoo bid. Other shareholders feel the same way, especially because Yahoo has no credible alternatives).
So here are some of the Microsoft alternatives we've heard about in the past 24 hours:
* Walk away. This is actually a great idea--because, again, the Yahoo deal is going to be a disaster. If we owned a couple hundred million Microsoft shares, we'd be beseeching Steve Ballmer to go this route. And we would be reminding him that, if he goes forward, and the deal is in fact a disaster, it will be his entire legacy. At this point, the odds of Microsoft going this route or slim, but they're at least as high as a compelling News Corp-Yahoo deal.
* Walk away from Yahoo and buy Facebook instead. Unlike Yahoo, Facebook is now a hotbed of energy, innovation, and engineering talent. In many ways, it's the future to Yahoo's past. Facebook isn't for sale, but an offer of $15 billion or so in cash would probably have the same impact on Facebook's shareholders (except Mr. Zuckerberg) as the $45 billion offer has had on Yahoo's: Sounds great!
* Refuse to raise bid. When you think about it, why should Microsoft raise its bid? Sure, Yahoo and big Yahoo shareholders are publicly invoking flimsy arguments as to why $31 is too low, but what do you expect? It's not low on any traditional cash flow measure. It's only low on "replacement value"--and if Yahoo continues on its current course, that replacement value will get lower all the time.
* Get Jerry and the board fired. Microsoft doesn't want to go this route (it's ugly), but it could if it had to. It has another month to put a slate of directors up for election. It then has another three months to campaign and bluster until the shareholder meeting. This will paralyze Yahoo for the entire period, turning the Sunnyvale campus into even more of a global job fair than it is now.
Bottom line: Yahoo's alternatives aren't really alternatives, and two of them--AOL merger and Google outsourcing have recently been discredited in the press. Yahoo's shareholders are getting impatient, and Microsoft's are getting more vocal about how it shouldn't raise its bid by a penny. The advantage, in other words, is now shifting back to Microsoft.
Purchasing it would not be a clever move right now - those involved in Facebook have a somewhat over-valued opinion of their own importance to the market, and any deal would most probably be totally overpriced.
Walk away: And demonstrate one additional failed opportunity to make a beachhead against Google, and further confuse their own shareholders that are already shell-shocked - they being caught in MSFT’s sudden but understandable epiphany. Too, dramatically raise their costs of accumulating the operating competency Yahoo already has in search/ad. Sure MSFT is dedicated to doing this with or without Yahoo, but it's not like they can repeal the laws of physics. They are only MSFT after all - no star-trek-ian phasers in Redmond in this matter... and they don't have any in CHINA yet either.
Walk away and buy Facebook: Can always buy Facebook later when Facebook has demonstrated a better case for monetization of s-o-c-i-a-l networking. As I’ve admitted, this whole notion is Greek to me.
Refuse to raise bid: To refuse to do so by even a small amount when that subsequent enhanced amount is likely to be rallied around by all parties – yaholders for value, and softholders for confidence and consistency and f-i-n-a-l-i-t-y – would be to further absorb negative energy caused by delays that breed contempt and all the other negative elements of your purgatory analogy that ultimately destroy value.
Get Jerry and the board fired: Superfluous – they’re doing that to some extent anyway. I think it too bad that MSFT either hasn’t understood, or failed to demonstrate well enough their understanding, that Yahoo’s brand should be untouched, unmolested and generally left to thrive on its own. Murdoch, regardless of what his motivations are, knows this all too well. If you remember, I’ve already suggested that NOW is the time for MSFT to decentralize itself. MSFT should spin off its operating divisions in some reasonable way and function as a modified holding company. It’s as much an epiphany for them as is their absolute need for Yahoo, and it would checkmate all the stumbling blocks against MSFT's growth thrown up by competitors, judges, the Dept. of Justice and the EU's Nellie Kroes. It's Kismet!... Now is the time.
Bottom line: MSFT has had the advantage from the start on Feb 1. They may be so close to accomplishing their objective now that the introduction of petulance from here may just erase their advantage. No time for pigheadedness.
Up men and to your posts!… Seize the high ground. Seize it now and you’ll never lose it from now.