Yahoo Board To Meet Friday, Not Decide Anything

Henry Blodget | April 10, 2008 9:07 PM

jerryyang4.jpgYahoo's board is meeting again on Friday, the WSJ says (YHOO). But they won't be deciding anything. Decisions may come next week--when the AOL (TWX) and Google (GOOG) negotiations are farther along and there's still a week and a half left on Microsoft's clock (MSFT).

Other nuggets from the encyclopedic report by KEVIN J. DELANEY, MATTHEW KARNITSCHNIG and JESSICA E. VASCELLARO:

  • "Many" Yahoo insiders still think selling to Microsoft is the most likely outcome (so do we). Jerry probably isn't among them.
  • The Yahoo board will talk about the AOL merger plan, but some Yahoo shareholders have reportedly already dissed it (Legg Mason's Bill Miller, for one, is on record saying he thinks there really are no Microsoft alternatives). The AOL valuation under consideration is $10 billion, which seems fair.
  • Microsoft insiders pooh-pooh the idea that they'll do something with News Corp. They don't need Murdoch, they say (and they're right). And Murdoch's only talking to them because Yahoo refused to value MySpace, et al, at $10-$15 billion (thank goodness).
  • If Microsoft did end up doing something with News Corp, they would probably cut Yahoo in half: Microsoft would take the "search and advertising technology, while News Corp. would control everything else, including Yahoo's broad array of online media properties." This would "allow Microsoft to focus on the software and technical underpinnings of online services while offloading content and information -- historically weak points for the software company -- to News Corp., which specializes in that realm. "All Microsoft cares about is search and the ad engine," one person familiar with the situation said."
  • News Corp. desperately wants a seat at the table because some execs think MySpace's growth has peaked (translation: they want to dump it while they can). Some also believe that, despite Murdoch's denials, he wants out of Google deal.

See Also:
MySpace-MSN-Yahoo? We Hate It!
AOL's Falco: Yes, We May Merge With Yahoo, No, I Can't Say How Many Of You Will Be Fired
Jerry Strikes Back: AOL and Yahoo in Advanced Merger Talks

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33 Comments

SoftwareSweatshop.com (URL) said:
Isn't Jerry looking particularly sexy in that picture?

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anonymouse said:
It's not just that most YHOO employees think a MSFT deal is the most likely outcome (which is why some people are leaving). YHOO conducted an informal internal poll among some managers, and a majority of employees said they would quit if the MSFT deal doesn't go through!

a AOL guy said:
Henry.
I saw a interesting note about MSFT buying AOL.
( http://seekingalpha.com/article/71889-microsoft-s-alternative-buy-aol-and-myspace )

care to comment about this possibility
joeblow said:
Well, Henry, it would be hard to put up a convincing argument against your assertion that the board won't decide anything on Friday the 11th, but in this volatile situation almost anything can happen at any time I suppose.

My guess is that Bill Miller wouldn't have made the "$1" comment even a few hours after he made it, and yet he might have expressed the same sentiment about Yahoo not having other practical alternatives. He probably feels the same way still.

I just don't think the potential deal with AOL/TW is going to fly. I don't think the market would put what would be the equivalent of an IPO price on the newly reorganized structure (the capitalized stock, not any attendant cash) that would be high enough to outbid Microsoft.

Thus, Yahoo shareholders would look straight to the bottom line of any cash component. Were Yahoo to buy back "billions worth of stock," I suspect it would have to represent a very considerable percent of the outstanding shares, or the shareholders would instantly discount (handicap) their probability of getting a cash-out, probably in the form of a competitive Dutch auction tender, since I can't imagine any other fair way of allocating cash.

AOL is just carrying too much reputation baggage right now for underperformance and probably wouldn’t bring that much excitement to the Yahoo shareholders. They're likely not going to bid the resultant stock over 30 unless it's almost a total cash take-out in the mid-30s, or at least significantly more than, say, a 40% repurchase.

I believe the shareholders would just see a deal with AOL/TW as one last irrational act because of Yang's philosophical anti-MSFT mindset. As I've said, I think he's finally cracked free from the continental ice and is just posturing for a higher price from MSFT, but I think he's still viewed in the market as likely to cut off his own nose to spite his face when it comes to MSFT.

However, MSFT can't know for sure what sort of backing AOL/TW and Yahoo might ("might" I said) have that hasn't been disclosed that would allow them to take the shareholders out with cash. We've been told repeatedly that nobody else is out there. But if there is an entity that might want to privately own AOL-Yahoo, all they need is enough money, their own or to convince the banks to back them, and they wouldn’t have to listen to the shareholders yap any more. Going private shuts up the shareholders.

Having said all of that, I still think MSFT would do well to ratchet up the heat on this board meeting (later today, Friday, 11th) because even a couple of weeks is critical to their efforts at accomplishing regulatory approval before the end of the year.

Were I Ballmer, here's what I'd do:

I'd dispatch a palace eunuch with a message to the Yahoo board meeting today and the message would be this, in 2 parts:

1- Herewith, MSFT respectfully does both: 1)- privately now raise by a warranted minimum of $1 per share the cash-only component of its prior proposal (without altering the stock component), subject to an immediate acceptance for the beginning of definitive agreement negotiations between MSFT and Yahoo, and 2)- certify to the board that, if and when MSFT begins a hostile tender offer, that the terms will be its initial proposal terms modified only by the exact addition of $1 per share to its cash-only component (without changing the stock component), except that this certification will not bind MSFT to limiting any eventual hostile tender offer terms to these described changes. MSFT will stipulate publicly that Yahoo’s agreement to enter definitive agreement negotiations will not, in and of such agreement or negotiation, obligate Yahoo to accept the modified terms described herewith.

2- Unless Yahoo has agreed with MSFT, prior to midnight, Sunday, April 13th, to begin formal negotiations for the purpose of concluding a definitive agreement for the merger of our two companies, the elements of part 1 of this message will be publicly released at that time.

I’d then sign off on it with yet another urgent but respectful request that Yahoo would accept that the time for this is now. But I wouldn’t chide them in any way… I wouldn’t use any unnecessary or useless attempts to be cute or to debate their last response to the Saturday letter. There's no reason to. Why?

If you remember, other than just refusing the merger price terms, Yahoo’s response had only one element of practical concern that implied a risk that Yahoo’s shareholders would suffer from a failure to accomplish a merger, and that was the mentioning of MSFT not responding to their requests for information about MSFT’s plans for obtaining regulatory approval in multiple jurisdictions. Well, MSFT maybe isn't yet willing to share the Keys to the Kingdom and it's possible they simply will not share this information completely with Yahoo prior to a definitive agreement conclusion. Tough, get over it. If they ain't, they ain't. It ain't you that's buying them... It's them that's buying you.

So, let’s look at these two elements of concern, price and regulatory approval.

It’s already unbelievably clear that MSFT expects to meet regulatory approval with this merger, and it’ll probably go through in all jurisdictions. If not, MSFT would modify it in some way to get the approval. They must have Yahoo and they will have it. You yourself Henry have noted that bigness alone, even sometimes monopoly bigness, is not the problem. It’s the behavior, and right now at least, MSFT is in conformity with the anti-trust authorities on both sides of the pond. The proof is in the pudding. They’d be broken up if they weren’t in compliance, regardless of Nellie’s own posturing.

I don’t know that much about the failed merger with Intuit, but I can rationalize that a merger at that time with Intuit would’ve given MSFT an unfair vertical integration of the financial services desktop software market. I would imagine that regulators at the time blocked the merger on the basis that MSFT had not quite crossed the line with its dominance of the desktop software that formed the basic tools of human communication (office, Excel, Word, etc. – I’m not an expert) and that these tools were the natural extensions of its operating system, but that giving them control over Intuit's products as well would have crossed that line, because they are next-level extensions into value-added enterprise… like when Standard Oil was broken up because it eventually controlled all the elements of production, transportation and sales of its products. It was straight-line vertical integration from the well heads to the customers and Standard Oil abused it by predatory practices. It’s the same now but not with one overriding and dominant company.

Now that industry is represented as an oligopoly, and that’s basically where the Internet is going in the upper echelons of competitors with such as Microsoft and Google and possibly one or two others (maybe not clearly expressed now, but time will probably bring them to the fore). Murdoch, AOL/TW and some other (Diller certainly) players will have a great deal of input in this eventual industry composition.

AT&T was broken up in the 80s because it sandbagged innovation for the benefit of preserving its cash cow without the expense of R&D and infrastructure improvement. But it’s more and more clear all the time that MSFT will be fighting for it’s life and they won’t be able to cap innovation in the industry by sandbagging. If they themselves sandbag, they’re dead.

Back to Yahoo’s shareholders’ merger perspective:

Yahoo’s management and board are not by their own assessment of regulatory risk going to be able to divert MSFT’s intentions for completing it successfully. If their shareholders sell them out from under the company, it’ll be a non-issue for management the minute they do, because the shareholders will not have a voice in the regulatory approval process and won't desire one. They’ll be passive, and thus the only issue they’ll share with Yahoo’s management and board… is price.

Yang and the board know this, so the issue they raised with MSFT about regulatory concerns is just useless boilerplate. We might see the chiding they did of Ballmer in their response to his letter as reasonable, but it was worthless, except when they alluded to his failure to initiate the very thing he was claiming they were avoiding, the at-meeting opportunity he had to talk price or, as they said (prphz) “advance the talks in any way you saw fit.”

They’ve now said the magic 7 words, that Yahoo is “not opposed to a deal with Microsoft,” and since price is all that remains as an issue, it’s time to go to the table with MSFT. A message from Ballmer in the above form would for possibly the last time give them an opportunity to prevent Ballmer from unilaterally establishing the moral suasion “take-the-high-ground” price.

Actually, were I Ballmer, I'd have already named the price in a publicly announced raised bid, but he's got his ego in the way. Big Dogs... Big Egos.

Bill Miller’s going to turn shares loose for a raised bid. He’s all but said so. I figure CRM will submit theirs as well, particularly their unit that has evidently almost doubled its Yahoo position to around 10%. CRM's already got so many Yahoo shares held in all its units, I'm surprised they're not waxing the floors and doing the windows at Yahoo's headquarters-soon-to-be-winery building.

Neither of those two major holders, or generally any others, are likely to be too happy about a dog and pony show that tries to turn AOL/TW-Yahoo into some sweetheart new capitalization that doesn’t ring a bell in at least the low 30s, and MSFT won’t let Yahoo get taken out without topping the bid anyway, so AOL/TW is probably just wasting the effort.

By now Yahoo should have a good idea of whether they can cook it up into the 30s with AOL/TW or not. The talk is that Google’s outsourcing deal, if made permanent and IF allowed by regulators, would add maybe $5 max (according to Henry?) to Yahoo’s value as a going concern, but that’s not on top of MSFT bid, but absent the bid. Shareholders aren’t going to sit around waiting for the monetization of that potential.

So Friday’s (today’s) meeting could be made even more eventful than you expect, Henry, were Ballmer to understand this way to turn the heat up another notch, without in any way blowing his opportunity to ratchet it up even more in a couple of weeks.

And he wouldn’t be breaking any promises either, whether he's made or assumed to have made.
joeblow said:
An addendum to my last comments:

Were two relatively equally matched and capitalized firms embroiled in a hostile or even a friendly but challenged merger attempt, and one side's management attempted to dominate its various shareholder or director supported groups, or the other company's management, simply for the purpose of altering business practices or effecting an opposed merger, then all of the stalling and resisting that Yahoo is doing might make sense for any number of reasons.

For example: The long fought case of HP and Compaq, in which the value of the attempted merger was not so much in immediately improved value but in the anticipation of an operational benefit from the merger. BTW, I still credit Carly Fiorina with the strategic success of HPQ's eventual merger, and the shareholders who opposed her should thank her now.

But, in this Yahoo-MSFT case, the values were so disparate at the time of the MSFT proposal that the value realized by Yahoo holders in the potential merger simply dominates all the average shareholder's expectations of why the merger would take place.

MSFT knew this when they bid so high on their initial proposal. Consequently, all Yahoo is now doing is frustrating both its shareholders and its employees by stalling against MSFT. It has certainly now gotten to the place where Yahoo is evidently no longer concerned for its own employees.

Because, just think what you in management are doing to them now... and you won't stop MSFT (I'm not a mystic and, sure, a meteor may hit Redmond first and then all bets are off), so why are you allowing this charade to continue and shake your employees to their emotional foundations. If it's true that employees are leaving in droves, it's you that's the cause, not MSFT's offer that you could've negotiated and closed (in principle) weeks ago.
Steve said:
Henry, I noticed that many time you or your other editors will go back to a post and edit or update it. This is good but it can be very confusing sometimes. could you please devise a good system where updated are clearly tagged also with a date and time for the update?
Henry Blodget said:
joeblow, once again, amazing. More thoughts soon...
Henry Blodget said:
Steve, thanks. Yes...this is tricky. If the change is meaningful, we usually place an asterisk in the title and then add the update in a special section. We don't usually note smaller changes unless they are flat-out errors (in which case we do an asterisk and a note). Sometimes, with breaking news, we'll publish a line or two and then keep fleshing it out until it's done, and we don't usually note that. Will try to think of a way for dealing...
joeblow said:
Well thanks, Henry... I suppose the way it turned out I put a great big fat slow pitch in Kara's danger zone, and then a couple of hours later she tattooed one into the cheap seat upper deck in left-center field. But then, she's got the batting average, and the yahooster connections.

That's out two, Jerry and you're at bat. For God's sake don't take a called strike 3 without at least fanning at one.

You spend the next two weeks playing mumbly-peg with that bat, instead of swingin' with it, and you're gonna go down in history as The-Poster-Boy for A.D.D.

Test?... You a test, do you? MSFT is gonna let you TEST THIS! in a couple of weeks.

They're still very, very scared of Google though, and they're desperately in love with your company, so return the damn R.S.V.P. You can always leave early if you don't like the party and retreat closer to oblivion if you want to.
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