Wall Street Losing Patience With Yahoo
It has been a while since big shareholders like Legg Mason's Bill Miller came out publicly to say that Microsoft (MSFT) needs to raise its bid to $35 a share. Privately, we hear, some big shareholders are increasingly grumbling that Yahoo is grasping at straws and getting terrible M&A advice. The market is increasingly concluding that Microsoft won't raise its offer (thus the stock drop yesterday, despite Yahoo's letter to Steve Ballmer). As MarketWatch's Therese Poletti observes, even sell-side analysts are starting to pile on the company:
"Yahoo management position is still that Microsoft's bid is too low and undervalues the company," said Charles Di Bona, a Bernstein analyst, in a note to clients. "Investors are becoming increasingly skeptical and there appears to be growing concern that this view is both unrealistic and self-interested on the part of Yahoo's management"...
On Feb. 11, Cowen & Co. wrote that Microsoft could take its bid to at least $35. But on Monday, analyst Walter Pritchard wrote "the letter sets in motion a process that is most likely to result in a transaction at or below the current bid price."
Contrary to Yahoo's assertion that it had received "positive feedback" from shareholders about its three-year financial plan, moreover, investors and analysts are increasingly ridiculing this, too. In an email exchange with SAI, one analyst described the plan as "a joke" and said he had heard no investor say positive things about it. Theresa Poletti quotes Bernstein's Di Bona as saying something similar:
"The Yahoo investor presentation cut no ice with investors," Di Bona of Bernstein wrote. "We saw the publication of Yahoo's Investor Presentation on March 18 as final confirmation that Yahoo's management and board had run out of ideas."
A consensus is also growing that Yahoo's claim that its Q1 was "consistent" with its previous forecasts likely means that revenue came in at the low end of the forecast range. If this is the case, the low-level grumbling of analysts and investors is likely to surge into a full-blooded howl.
Next Steps
The good news for Jerry & Co is that they know something the market does not: what the Q1 numbers really were. Yahoo's performance in Q1 will determine the next act of this drama, as well as what stance toward Microsoft Yahoo should take.
If Yahoo's Q1 was weak (low end of the guidance range), Jerry & Co. should start negotiating with Microsoft immediately. If Q1 was strong, then Jerry can afford to stonewall until Yahoo releases its Q1 results--at which point, the company's insistence that it is worth more than $31 will gain credence, and confidence in Yahoo's management might start to return.
We think Yahoo's M&A team probably sees the situation similarly (or should). Thus, if Yahoo does not start negotiating with Microsoft this week, we will gradually conclude that Yahoo's Q1 was okay. If Yahoo rushes to negotiate in the next day or two, meanwhile, we will conclude that Q1 was a bomb.
One thing is certain, though: If Yahoo's Q1 was weak and Yahoo ignores Microsoft right through the Q1 results, Yahoo's shareholders will likely lose all remaining faith in the company.
See Also: What Yahoo Didn't Say In Letter To Microsoft: "Our Shareholders Support Us," "Q1 Was Strong"
On one hard, MSFT has proven that, on their own, even while running MSN at a huge loss for a decade, for whatever reason, their for-fee shrink-wrapped product culture doesn't extend well into the online space. They need to do something here, and Yahoo certainly represents an at-scale global platform they could leverage in the GOOG-MSFT wars, assuming two big things:
1. They would run the online business at arms length (Jerry and Sue removed and replaced with new talent)
2. The DOJ, EU, and Chinese regulatory approval process would be done in a timely manner, and not impose excessive terms to garner approval.
The counter to that point of view is that the ill will and talent attrition issues at Yahoo exacerbated by the back and forth of this deal makes this a poison pill much more costly that Jerry's $1B retention program - it's a $40+B mistake that in the end will distract MSFT from other paths for 18 months during an uncertain approval process, and a reasonable probability that at the end, they are left with a total cluster f* of a business.
My view: It is time to walk away. Let Yahoo self-implode in shareholder lawsuits over the next 3 years, and use your capital to pursue mobile, semantic search, SaSS, PaSS (platform as a service), etc., that represent the future of the net, not on a 1.0 portal business that at best is a 1.1 release of AOL.
Okay, now I’ll parse the letter and the response. Only, I’ll cut to the chase, because everything else is no more than useless gesturing… like two 5th grade boys pushing and shoving each other on the playground after school
Here’s Ballmer’s letter:
http://biz.yahoo.com/prnews/080405/clsa500.html?.v=1
…and here are the only parts of it that we either didn’t already know, or that might be contested by a logical examination of the facts. I’ll take the only fact worth contesting first (quoting):
“By any fair measure, the large premium we offered in January is even more significant today.” (end)
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Well, not hardly true at all. What they offered in January was $31 in value on that date and it’s not worth that now. Had Microsoft’s stock gone up, his statement would’ve been unequivocally correct, since the $15.50 in cash would’ve been unaffected and the initial 15.50 in Microsoft stock would’ve increased in value. Ballmer is free to suggest any number of subjective measures he may interpret to be fair measures, but the fairest measure that can ever be expressed is a marked-to-market value (BTW, this is the very reason for a day long dog and pony show in front of Congress just last week) and thus his statement is false in the most principled sense.
But, let’s move on to the only other meaningful part of his letter (quoting):
“If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo! board. The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal.” (end)
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And so you have above in these two quotes the only meaningful sentences taken from the entire epistle. Everything else is just wasted words and didn’t tell Yahoo, or us, anything we didn’t already know.
Apparently, whether it’s true or not, the media and its associated Pundinistas have built into these statements a presupposition that Ballmer MUST do two things upon a failure to reach a definitive agreement with Yahoo before the deadline: 1)- Begin a hostile tender, plus filing a BD slate and beginning the proxy campaign, and 2)- Make the hostile tender lower in value than the initial terms required in order to extract a penalty from Yahoo for their tardiness and obstinacy.
In other words, the Pundinistas assume that Ballmer has no choice but to honor the implied commitment within his statement in order to deliver on its implied guarantee.
Cramer has conveniently said that Ballmer doesn’t kid around. He’s been loud saying it with a gigantic public forum and following, even larger than Jim Goldman’s Silicon Valley Bureau commentary, and whatever your opinion of Cramer is (mine is that he’s a genius, one of the few people I would fear debating), both his volatile but convincing Ballmer commentary and Goldman’s accommodation of Microsoft’s leaked terrorism last Friday at the close have worked to effect a powerful image of Ballmer and his assumed capability to extract that penalty from Yahoo.
He may not have so much power of command in this tactical struggle with Yahoo.
Let’s look at what he said exactly about Yahoo’s changing value from Microsoft’s perspective and what the underlying meaning of that is that could easily be defended later even after a higher bid. It’s really the key to everything that Ballmer said that we don’t already know, or at least beyond the fact that he has now read the riot act to Yahoo with a deadline imposed for three weeks. We didn’t know that until he wrote it in stone Saturday.
I’ll reproduce that part again (quoting):
“If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal.” (end)
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Here’s the core essence of the above: “…from our perspective which will be reflected in the terms of our proposal.”
That doesn’t mean Ballmer would feel obligated to leave the deal unaltered (currently a penalty) or that he would necessarily reduce it to uphold his bargaining and threatening honor somehow. It can be defended practically and logically, even if Ballmer raises the bid in an anticipated hostile tender launched possibly first in the press near or after midnight, Sunday, April 26th. Why?
Because the phrase “from our perspective” only means that whatever their perspective was on February 1st of the value that Yahoo would bring to a merger with them, it’s somewhat less now than it was then. Well, that is easily defensible as being patently logical and a reasonable observation of current market and economic conditions, but it doesn’t mean that from their perspective that that value is equal to or lesser than 31.
When they bid 31 on February 1st, it wasn’t because they perceived Yahoo’s value to them as being “fully and fairly” 31, but rather considerably higher, possibly even into the nosebleed range of 40-45 or even the highly doubted 50 represented in some punditry. Them perceiving the value as lower now, because of being forced to take the matter directly to Yahoo’s shareholders - specifically from Microsoft’s and only Microsoft’s perspective - only means that whatever value they had ascribed to Yahoo prior to these two unproductive months was higher than they ascribe to it now. So what… Tell us something we can’t figure out for ourselves.
Furthermore, it also means that had Yahoo chosen to respond agreeably and promptly in a good faith merger discussion, then, that they might’ve had a better opportunity to garner a price nearer to their own press-leaked "at least 40” aspirations. Perhaps they might’ve successfully negotiated for, say, 35-38, when now they might only expect to extract, say, 32-35, because of two factors, market conditions and the stalling techniques that included enhancing the poison pill attributes of their defensive tactics.
So, there’s no absolute requirement for Ballmer to reduce the bid. In fact, my guess is that it may fall flat on its face if he goes hostile either with the original terms or a lesser value in terms.
But now he’s got another problem. He’s now boxed himself in to having to honor his commitment (as commonly perceived by the Pundinistas) to fulfill his honor and at least make good his threat to make the hostile tender in 3 weeks if not already reached an accord with Yahoo by then.
In my humble opinion, he’s therefore boxed himself in to making a raised bid hostile tender, probably not later than April 27th, absent a deal with Yahoo before then.
The corollary to this is that, likewise, Yahoo probably has until the deadline to agree to negotiate in good faith in order to reach a private agreement beforehand that would prevent Ballmer from unilaterally naming the price in a hostile tender, the newly bid tactical “take the high ground and defend it” price.
So, Yahoo… you still gonna sit on your hands?… Or are you going to locate and de-fuse the Ballmer Bomb before it goes off?… Which?
One can only wonder why you didn't put this exceptionally good analysis in the MSFT/Yahoo section to begin with.
I can only add one thing:
Imagine that the process of disruptive d-e-s-t-r-u-c-t-i-o-n were suddenly discovered to be e-x-p-o-n-e-n-t-i-a-l in nature. It only accelerates your case.
It would make MSFT's hesitancy to take the initiative and close the Yahoo deal seem tiny, vindictive, punitive and and petulant, wouldn't it?
All for the sake of pennies compared to dollars of their future pro-forma EBITDA.
Your analysis makes MSFT's reluctance to pay fair value seem laughable.
MSFT is currently much like Ford was, in the 70s, when Ford complained about Japan's consumers not responding to their offering of Ford Crown Victorias in Japan that did not remove the steering wheel to the right side of the front seat.
I think they sold something like under 300 cars one whole year.
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New Subject:
A ****word**** for your webmaster: Geez, guys, the idea is to create a captcha code that humans can f'n READ!!... instead of having to play 20 f'n questions with!!!!
Catch my drift?
http://online.wsj.com/article/SB120771207446300829.html?mod=yahoo_hs&ru=yahoo
The Street is ALWAYS losing patience with Yahoo. It's the same Street that is now in a complete meltdown because the super geniuses who run it decided they could make a fortune off risky mortgages. WRONG! You could be a little bit more skeptical of their collective wisdom given how the economy is doing.
The Street doesn't seem to believe anything the company says. OK, it's had some bad times. It seems to pays even less attention to what it's actually doing. Even worse, the press and the punditocracy (I'm looking at you, Henry) don't seem to even bother to cover much of anything the company actually does. This is laziness. Even when Yahoo succeeds at something, somehow it gets turned into a failure.
Meanwhile, you've managed to put halos over the heads of the Manny, Moe and Jackass over at G. They can't seem to do anything wrong, and they succeed even when they fail. And they're so nice. And rich. Did I mention rich. I think you're all envious.
How far does the stock have to fall over there for the press to look critically at the way they operate? Or to look into their personal ethical issues? Valley Wag manages to do that. Why doesn't anyone else?
How many people at the Big G are contractors working without health insurance or any benefits at all? Why should they be paid little while the Pep Boys rake in billions. Is this a good model for American business?
What is the company's real commitment to the environment with all its jets flying out of Ames, spewing carbon and jet fuels into the air? And what precisely is their deal with Ames? Why doesn't anyone look into that more closely?
And finally, Henry, let me ask you this: Are you using Vista? Aren't you afraid Microsoft will do for search what it's done for OS? Which is to completely screw it up.
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