How Yahoo (YHOO) Blew The Microsoft (MSFT) Deal, Part 1
- It suggests that Yahoo knows that its insistence that Microsoft's offer "substantially undervalued" the company won't pacify (or persuade) burned Yahoo shareholders. Instead, the company appears to be saying "If only we had known they would really pay $33, we'd have acted differently."
- It suggests that Microsoft may have been looking for an excuse to walk--and that Yahoo misjudged this. This makes sense, given that Steve Ballmer appears to have soured on the combination.
- It might lend credence to the theory that this is just another negotiating tactic by Microsoft--a card played in the hopes that Yahoo's enraged shareholders will force the company into a deal. A source close to Microsoft does not think this is the case--and neither do we.
Our initial conclusions? First, Microsoft walked away in part because of price and in part because Steve Ballmer lost his enthusiasm for the deal. In our opinion, this makes a future deal less likely (especially over $33). Second, Yahoo misjudged Steve Ballmer's commitment to the transaction and, as a result, blew it.
BACKGROUND
Team Yahoo is suggesting the Microsoft's $33 offer was "purposely vague"--i.e., that it wasn't actually a real offer (CNBC story here and a source we spoke to says the same). In fact, one WSJ source said some folks on Team Yahoo only learned about the increased bid in Steve Ballmer's sayonara letter. Our Yahoo source says Microsoft merely told Yahoo it would raise its offer "a few dollars," but refused to specify whether this meant a few dollars from the then-value of $29 or the original bid of $31, whether the new offer was cash or stock, etc.
The desired implication here is that Microsoft didn't really raise the bid (which would offer Yahoo's board an excuse for passing on a $33 bid). If it is true that Microsoft's increase was "purposely vague," it's also possible that Microsoft either wanted an excuse to walk ("Look, we raised our bid, and they still scoffed at it!") OR that Microsoft wanted Yahoo shareholders to think Yahoo's board had scoffed at $33 so a shareholder rebellion would force the board to sell at $33 or below.
Meanwhile, Team Microsoft vigorously disputes this account, saying that Microsoft General Counsel Brad Smith delivered the $33 offer to Yahoo board lawyer Ron Olson on Friday, a whole day before Jerry Yang and David Filo met with Steve Ballmer on Saturday. A source close to Microsoft says further that Yahoo never even asked whether this $33 offer was cash or stock. The message Yahoo delivered in Saturday's meeting, this source says, was that Yahoo's board wanted $37 and Jerry and David actually wanted $38 and that $33 wasn't in the ballpark.
Yahoo CYA?
In our opinion, this whole dispute reads like ass-covering on the part of Yahoo. The only reason Yahoo would float this item into the press, we think, is in the hope that Yahoo's board will be forgiven for passing on a $33 bid. Even if Microsoft was looking for an excuse to walk--and, therefore, made the offer "purposely vague"--this still doesn't explain why Yahoo's board didn't jump on it.
Based on Yahoo's public statements to this point, Yahoo has been trying to convey the impression that Microsoft's bid was so low as to barely be worth taking seriously. It's therefore hard to see how it matters how serious Micrsoft's $33 offer was: If Yahoo's position was "$37+ or nothing," why are the details of how the $33 offer was conveyed even worth going into--unless you're trying to explain, in hindsight, why you made decisions that ultimately blew the deal.
What Really Happened: Yahoo Gambled And Lost?
Based on this $33-offer dispute, it seems likely that Yahoo underestimated the possibility that Steve Ballmer would pull up the stakes and walk--and, therefore, was trying to hold out for a higher price. Oops.
Just Another Poker Bluff From Card-Player Ballmer?
Is Microsoft's bid withdrawal just another bluff? It's possible. Steve's a card player, and he and his advisors probably foresaw the shareholder storm that is now walloping Yahoo--as well as the chance that this storm could be so intense that it could force Yahoo into a deal.
That said, we don't think that's why Ballmer walked. We think he walked because:
- His ceiling really was $34-ish, and it probably seemed that Yahoo just wasn't going to get there.
- His enthusiasm for the deal had waned over the past two months--as many of his own shareholders, Yahoo management, and the press peed all over the combination.
In short, we think Steve walked because he just wasn't that eager to do the deal anymore. And given Yahoo's position since the bid was announced, we don't blame him.
The only chance a deal like this would have of working would be if both companies were completely committed to making it work. And it's hard to see how Steve ever would have gotten that level of enthusiasm from Yahoo--when Jerry, David, and the board have spent every waking minute for the past three months doing everything they could think of to avoid a fate they apparently considered worse than death: a Microsoft takeover.
Maybe they should hire Paul Newman and Robert Redford to handle the next phase of the negotiations as well.
In saying a deal clearly isn't meant to be, they could very well be playing to fears that selling out to the #1 player in the market isn't the best strategy.
In a Google/Yahoo partnership, you tell me who would have the upper-hand?
First, the deal would be a disaster. Then, when it doesn't happen, someone blew it.
You guys have NEVER understood the Internet business and obviously don't care to, except to whine about how it does or doesn't make you money. Investors my rear. Delusional crybabies at the blackjack table.
The only way it made sense was Blodgett's suggestion to keep Yahoo as a separate company, but even he backtracked on that every other post.
Merging these two companies would have been a true disaster on the scale of AOL-TWX and in the end would have wiped out billions of dollars of value not to mention innovation on the Internet (something that is on life support already). Jerry and Steve did the only right thing by stepping back from the brink.
The only truth that has come out of this is that one-trick-pony Google is a house of cards and will have its day too when it's time to build up the new grossly-overvalued-thing-of-the-moment and you all go running for cover. It's only a matter of time, and that time always comes. Finance? Fashion.
I think of Chris Moltesante running that boiler room in that episode of the Sopranos, and it makes me think all you do is wear better suits.
If the outsourcing deal with Google is done, then you bet there will be no second chance for Yahoo.
If Yahoo does not pursue the Google route, then there might be a chance for a MicroHoo in the near future.
I just don't believe Microsoft will choose to fight Google without Yahoo.
Now that the deal is no more, Yahoo can outsource Search to Google and improve its cash flow while focusing its energy entirely on the portal, its online and social media. In fact they might want to position themselves as THE leader in the social networking space and buy MySpace to acquire significant scale by combining the user bases of both portals and lead in building the next generation social network platform.
Yahoo has the content, technology and reach, beside, social networking is an emerging high growth segment where the active involvement of one of the big thee will make a huge difference.
Yahoo needs to realize that Google is not a friend and Microsoft is.
Once Jerry and the BODs realize that, then we have a MicroHoo.
Yahoo's board is only responsible to YHOO shareholders for the latter. Microsoft's board is responsible for what happens after the deal.
I suspect that part of what happened over the past three months is that Ballmer's team began to see how difficult a combo this would be--and that likely weakened his enthusiasm for the deal.
I would expect to see an announcement from Yahoo about a deal in the very near future.
I don't think Cap Research and the others will be happy with this sharp drop in YHOO...while MSFT barely budges.
Before today, the dual shareholders were imo a brake on a deal.
Now I wonder if they'll try to salvage one?
here's the real story. It's a Google story:
How Google’s Checkbook Stymied Microsoft
By Saul Hansell
Shortly after Microsoft announced its hostile bid for Yahoo, Google objected and raised the prospect that it would fight to challenge any merger with the government.
As it turned out, Google was very much the spoiler in the deal. But its most effective weapon was not threats or coercion, but its very effective, and unconventional, use of its own checkbook.
By outsourcing to Google they will hand over a LOT of data, like search queries. Google will gain deep knowledge on how Yahoo! operates, where their customers sit, and what they are looking for. This devalues Yahoo! to a degree that they will be depending on Google to survive. Sure, they will be the top publisher in the Google network, but fully depending.
Their talent will leave, either directly for Google (makes sense, huh?) or for Microsoft (makes sense, too), or for other opportunities in the valley.
Yang blew the deal, and I just hope that he will pay for this.
All you analysts and ex-analysts just want to impress the big guy by guessing what they want and helping out at the expense of the regular (majority) investors. And in some cases yall are fully conspiring with the big money... Pathetic henry!
If true, Henry -- then Microsoft needs a major housecleaning and you should retitle this "How Microsoft screwed up."
Come on -- you know before you make a $40 billion offer if the parts will fit together. And you don't whine that it's just $5 billion too much when making an offer that size.
No, it doesn't seem like either side really wanted this deal in the end, but at least Yahoo didn't go out one day to the public on a weekend and scream that it wanted it. Microsoft did. And Microsoft spent the next three months telling us how important Yahoo was to get the scale they need to get Google.
The question isn't how Yahoo blew the deal. It's really how Microsoft goes forward after telling the world it can't get anywhere against Google quickly without Yahoo and instead has to go back ot the "long term" approach it has been taking the past five years toward a dropping marketshare.
In the absence of a much-larger-than-expected contribution from a Google deal (which, given the $1 billion number being thrown around, seems unlikely), or another approach from Microsoft, we'll probably be waiting a while for $33.
with regard to microsoft, they have already lost many key management and engineers as a result of the yahoo bid. no doubt, they are desperate to get something done - but with whom? there are no other online services to the magnitude of yahoo. i still believe a friendly deal could have been done @ 35/share, if only someone had budged to make the offer.
Do you guys know that all those "Ads by Google" are electronic spies for Google? Every access to a site with "Ads by Google" will be logged by Google servers.
Loved your previous coverage. I'm surprised so many of your readers (passionately) missed the mark by repeatedly stating a 'walk' was very unlikely.
I guess it goes to show, you cannot put much into these blog things.
Did Yahoo! blow it? My impression is they did exactly what they planned to do: not merge with Microsoft for less than X dollars.
Henry Blodget will start posting stuff quoting prior stories that he posted and he will say: As I said back in...
Henry stop trying to play for every click you can get... low life...
@Danny: Search engine types hate the big MSFT as much as they love the big G. But how in the world can MSFT have screwed this up even remotely as bad as Yang and BOD had? They wanted the deal bad, but this just came to show their emotions didn't get the best of them.
Something that sadly couldn't be said about Yang and Co., who never had the best interest of their shareholders at heart but the totally emotional fact that they'd as much as drink blood from a baby than be part of MS, even if everything is pointing towards their clear and present decline.
If that is the case, then outsourcing the most strategic aspect of their business - the yield of their ad platform - to Google is mistake.
If outsourcing to Google is a strategic mistake, then Yahoo returns back to the position of needing scale as a way to lift yield and revenue, which means they need the Microsoft deal.
We should be back to round II with MSFT in a few months because the combination of the two - and the scale that comes with it, which is the strategic rationale for the deal - remains.
Didn't you nominate yourself as the chief Cook, Bottle Washer and Walkster?
Has it been a good day for the Walksters?
What about the annual meeting and the BOD elections?
Even though MSFT has abandoned a proxy fight, the prospect of unhappy shareholders unseating the BOD at the annual meeting is still a form of pressure that might lead to a deal.
But if the meeting concludes and the BOD survives, doesn't that pressure evaporate?
Wouldn't the BOD have in effect a one year mandate to realize value organically?
The mofo is doing more talking than in all the last 3 months!
http://www.reuters.com/article/newsOne/idUSWEN546720080505
Ballmer, I can only hope you are readin' this.
You know why?... Because, you stupid mofo, a f'in palace eunuch with shit-for-brains could close this deal t-o-d-a-y, probably with ONE f'in phone call conducted with decorum, respect, style and in good faith!
Yang is sending you body language that he is ready to close. If this was a f'in DATE, you could GET YOU SOME this very night. Does that register in that f'in dumb ass brain of yours?
Can you manage to get that big ass head out of that big ass long enough to close the f'in deal?
I could close the mofo before mid-f'in-night!!!!... but I don't have my f'in head 4 f'in feet up a f’in bull's ass. You do, you stupid shit!
Do you get the signals, you stupid mofo?… He’s even holding off of the deal with Google. It’s right there in front of you, you stupid mofo, you!!
All that time and effort, and you’re right there… right F’IN there, unless you’re TOO F’IN STUPID to know it!!
You kiddin me? You're still trying to pin this fiasco on Ballmer??!!
I'm not a Ballmer fan not by a long mile but seriously I can't fault him for anything he's done with this deal, so far.
I can understand your frustration but come on, dole out verbal abuse where abuse is truly due. Squarely at the feet of the "O'Purpled One" and no I don't mean Barney the Dinosaur.
As the saying goes, "Yahoo Happens"
You suffer for your namesake.
Everything, and I mean e-v-e-r-y-t-h-i-n-g points to Ballmer.
Let's hear it from our SAI brethren.
Who do you believe is more truthful about the details of these negotiations:
Ballmer?___
or Yang?___
Tell the folks at SAI and the listening audience your opinion.
Yahoo CEO open to more Microsoft talks
http://biz.yahoo.com/rb/080505/yahoo.html?.v=9
This is never going to end...
But in the end it takes two to tango. If Yang was so willing to deal it would have been done by now. But Yang is just now acting "open" since he has been racked over the coals by nearly everyone across the world. The worldwide level of respect for him as a leader and businessman in general rival levels usually only reserved for GHW Bush.
I guess I have already taken a side!
I really really even squinting very hard can't see how you could fault Microsoft over Yahoo here.
He bid, he played the media game, he gambled on Q1, he threatened he cajoled, he huffed and he puffed, negotiated and raised then when it looked like taking the summit would have cost him too much, he pulled back.
From a tactical perspective (with the exception of the Q1 gamble) and going back to the beginning of time he's played this one like the best of them.
With the luxury of having no real “moral hazard” on your hands, why don't you tell us how "joeblow" would have done it?
Institutional shareholders are clearly not looking for the long term good of the company in this case, but rather short term gains for their holdings. Should Apple have sold out as per Michael Dell?
Any merger that big is doomed to failure. Microsoft should figure out how to get a stake in the inventory without all the baggage, and Yahoo should just work on execution.
As a participant in the AOL/TW merger, as well as the Netscape/AOL merger, I would say that there is no value in putting things like this together that is not outweighed by the chaos and lack of ambition of the employees in such a merger.
Just because someone bids for you does not mean that you need a buyer to survive. Yahoo needs a CEO that can tell a stroy and carry a vision -- a product czar perhaps.
So -- your premise that Yahoo "blew" the deal -- more like saved itself from being the walking dead. No slight to Microsoft here -- they now have a chance to buy inventory at a better price and acquire folks that would be happier about it potentially as well.
I think Yang and the Yahoo board are more to blame. Why and how is it possible that the board would send Yang and Filo to meet with MSFT by themselves??!? I just get a sense that Yang would do everything he could to stay out of MSFT's grasp and shareholder value be damned!!
Ballmer has to take his share of the blame also. These two groups of dipsh*ts couldn't do the math and find common ground between $33 and $37?
I hope the reports about the large shareholders putting a lot of pressure (finally!!) on Yahoo's board are true.
The question still remains - what will MSFT do if Yahoo actually announces a deal with Google? How bad does Ballmer want to keep Yahoo out of Google's hands? When an acquistion has this much strategic long term value then $2-3 more a share is $2-3 a share not $3-5 Billion dollars (if you know what I mean).
this is one of those times
I think that had I been Ballmer during that last meeting, I'd have gone into the negotiation understanding that Yang and Filo were there for a spirited final closing discussion.
They weren't there to kiss Ballmer's ass because he's "Microsoft."
They wanted some understanding of just how the deal would go down. They claim through the press that Ballmer never made the final offer definitive... not in terms they could understand. I believe them. It fits with Ballmer's explosive nature.
Ballmer just figured he could toss out a "couple dollars" and not define it. How much stock?... How much cash?... Would there be a collar?
These are the kind of questions that anybody with any sense would want to know before they said "yes" and Ballmer would run to the press and define the "yes" in any terms he wanted.
I believe Yahoo's recounting of the facts. I believe what Yang said in the press. They were there to hammer out a deal. Ballmer got offended because he couldn't brow beat them into taking the deal the way he wanted it to go down.
As a result he got pissed and left, right when the deal was in his clutches. He'd have gotten Yahoo for 37 or less, maybe just 34, when there's no question from the start MSFT must have known it would take mid-30s because (assuming they used their bankers for anything but bowling pins) they STARTED WITH 31!
I guess, illusionist, that you'd have to know me to understand what I would've done.
I'd still be there, with a sleeping bag and a sack lunch. Yang and Filo would not have come back to Sunnyvale without giving me a closed deal.
-Ballmer wanted a capitulation and to muscle it over his own way.
-Yang and Filo were there for a vigorous and spirited street market barter... a place where the language of the final work-out can even appear to be insulting and hostile...
And Ballmer walked because they might've informed him that it had been their preference for "38" but that they'd be willing to "let it go for 37."
Of course nobody but the participants know what was said and when, but I'm just telling you I believe Yang's version over that terrorist bomb-job that Ballmer put in his Walkster letter.
Both sides should have approved a range and sent somebody just like me - just like "joeblow." It would've been a private cat fight, but assuming the ranges overlapped, they'd have gotten a deal or they'd be sending food and supplies to us while we were locked in negotiations.
When it was all over, my counter-party and I would be like the best of friends. We'd have possibly called each other sum'bitches, but we'd have gotten to a deal that would have saved MSFT BILLIONS in comparision to what they will have to spend otherwise.
On the flip side, Microsoft should have never have opened so high. They should have opened with a 45% to 51% premium and then get walked up to $30-31 a share. They framed the deal incorrectly.
But, hey, what do I know? It's not like company execs like to listen to professional dealmakers anyways...
They'd have never gotten Yahoo under 29 certainly, probably not under 31-32.
Ballmer was correct to have put a high bid on the table first, one that should have been about 80-90% of the tactical maximum bid necessary to gain a friendly merger.
Saturday, that friendly merger sat across the table with him, ready and willing to move to a close, probably well within Ballmer's tactical range.
I picture Ballmer looking in the mirror doing the Al-Pacino-from-Godfather-II: "My offer, Senator, is this, Nothing. You will give me the casino license and you will pay the fee".
Look, Yang has a few $billion so HE doesn't care what happens to Yahoo. Ballmer has $15B, so he can't be blackmailed into overpaying for a crap deal.