Microsoft and Yahoo In Talks: Two Sources Say "Search Only, Not Buyout"

Henry Blodget | June 24, 2008 1:25 PM

jerryyang7.jpgYahoo (YHOO) and Microsoft (MSFT) are talking again, say TechCrunch, CNET, and an SAI source.

TechCrunch's sources say the two are talking about a full buyout. One of our sources was highly skeptical of this. A second source said "TechCrunch is 1000% wrong."

CNET thinks they're talking about just a search deal. Our sources agree that this is likely (though one was not even certain the companies were talking).

On a search deal, we would be surprised if Yahoo caved and agreed to talk unless Microsoft substantially boosted the terms of the deal it offered two weeks ago. Even if Yahoo is in full panic mode--which, given the plummet of the stock price and the departure of many senior execs, seems possible--we can't see the company being pathetic enough to welch on its deal with Google and go crawling back to Microsoft without a major excuse for doing so.

If the companies are talking about a full buyout--which our source insists they aren't--it is almost certainly at a price lower than the $33 Microsoft offered a month or so ago. There is no reason on earth for Microsoft to pay that much now that reeling Yahoo has dropped to $21 again. Yahoo shareholders, in fact, would probably be grateful for $25.

As to Microsoft's official response, TechCrunch's Michael Arrington intelligently observes that Microsoft's "No Comment" is a change of position from yesterday.

Microsoft official comment is “no comment,” which actually contains more information than it appears to. For well over a month, Microsoft has officially been saying they’re no longer interested in Yahoo. They didn’t say that today.

See Also: Why Yahoo Passed on Microsoft's Search Deal--Full Details!

 

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42 Comments

temporal said:
I don't know why you would think it is pathetic - would like it if you would clarify.

I think from MSFT's perspective - this is perfectly rational. They could have waited and let YHOO squirm when it totally destructs from within. This may get them their quarry (considerably weakening with every passing day!)at a lower price later. But what is the point of that - if their ultimate goal is to catch up with GOOG(which has not stopped innovating when MSFT & YHOO try to figure their way out of this mess!)?

I think, the sooner they can get this sorted out - it is better for all concerned.

Then again, from MSFT's perspective search deal is the way to go - no big regulatory hangover!
Pathetic from Yahoo's perspective. Now that the stock's at $21, suddenly they want to deal.
Unless Microsoft suddenly came back with a much bigger number on the search side, in which case of course they'd listen.
Rav (URL) said:
pathetic? Are you kidding? This is great!!...
Algorithm:

1. MSFT talks to YHOO about acquisition.
YHOO goes up and MSFT tanks...
2. MSFT walks.
YHOO goes down and MSFT stuck in neutral.
3. Go back to step1 for next iteration.

While MSFT keeps playing those games with YHOO the end result...
- YHOO gets weaker in the market, but still stays significantly higher than its pre-MSFT-bid level of $19
- MSFT loses about 5-10% on every iteration above. Its already down from about $32.5 pre-bid to about $27.5. There's another iteration in progress and the walksters are trembling.
- GOOG improves its market share v/s YHOO+MSFT and laughs its way to the bank. It also has YHOO trapped in a deal where it fills GOOG's coffers one way or the other..

This is great if you are GOOG long, MSFT short and can time the waves on YHOO.



Tom said:
The sticking point from MS may have been Bill Gates, since this is his official last week in office - so this may give Steve Ballmer more flexibility to negotiate with Yahoo (which he clearly wants). I would not be surprised to see a deal consummated sometime in July.

If there is any way to stem the bleeding from Yahoo, let's get it done sooner rather than later.
hehateme said:
THIS WHOLE THING HAS BECOME SAD. TACO BELL WORKERS MUST HAVE MORE PRIDE GOING TO WORK THAN YAHOO EMPLOYEES!!!!!
stone said:
I'm still one of the lone voices that thinks this is all a game. Microsoft is waiting for Y's stock to crash, which it is doing, and will come back with their previous offer. The $33/share will look great by way of contrast and Yahoo may be forced to accept. Microsoft is playing out a very well orchestrated game here. The PR of walking away was key to driving their stock price down and will be key to winning out in the end.
I'd be surprised if they paid $33 at this point, Stone. Really don't think they'd have to. Yahoo has fired off every Roman candle it can--long-term growth plan, other deals, Google search deal--and stock still ticked $21 today.

But all that said...folks I've spoken to are confident buyout not on table. Perhaps that will change.
stone said:
Please remember that disinformation is part of this game. The only people that may know are at very high levels of Microsoft and Yahoo, and possibly Morgan Stanley and GS.

TM said:
"we can't see the company being pathetic enough to welch on its deal with Google and go crawling back to Microsoft"

Great line, although the image of Yang on his knees in front of Balmer would be...never mind.

Yes, that's true. But if I were holding the same cards Steve is, I'd never authorize my bankers to pay $33.
TM said:
+1 with Henry. $25 max (if at all).

As a side note, this back and forth must be ripping the arbs to pieces...:)
stone said:
Oh, you may be right about price but I do believe they are following the tactics I've been describing. Ballmer just made the stock tank. Now they have Yahoo softened. Making a deal happen just got easier. This is major league hardball being played.
TM said:
as a side, side note:

I wonder if TechCrunch's "source" is Bill Miller?

He's got a shitload of YHOO he needs to dump, perhaps before quarter's end...

http://finance.yahoo.com/q?s=LMVTX
http://finance.yahoo.com/q?s=LMOPX
sm said:
In a business deal of this significance, personal egos have no place. If this deal made sense a month ago, it makes sense now. If $33.00 was a fair price a month ago, it is fair now. Microsoft could offer $35.00, close the deal, and focus on comepting with Google.
AJ said:
sm: The offer was made pre-'retention' package, pre-Google deal, and - let's be honest - now that Yang and team have shown that they are so opposed to any deal why would MSFT trust them?

Deals don't get done at a fair price. They get done at a price everyone agrees to.
frustrated said:
Pathetic? Henry what the hell are you talking about? Yahoo clearly needs Microsoft; look at the stock price falling like a rock and execs leaving by the hour with the Google deal in place. Microsoft cannot deliver on their promise to win in the online space without Yahoo read Kara's story posted today. Both Yahoo and Micrsoft win and need each other ohh yeah and the share holders as well, crap was acting like Jerry there for a minute and forgetting about the share holders who OWN THE COMPANY NOT JERRY OR THE BOARD. Henry have you forgotten the golden rule a good deal is when both sides win, if Microsoft beats what little stuffing Yahoo has left out of the company that creates problems and animosity after the deal is done, don’t need that. It is business, let’s keep the egos and the other crap out of it.
Zhiyi (URL) said:
Henry: You've been putting up that photo over and over again. No offense to Jerry - actually, I like him - but as a shareholder wishing for a deal, to see the photo of Jerry ruminating is depressing. Could you put up another photo (of another head)?
flo said:
hello henry,
as former yahoo and shareholder what can I legally do, to get rid of that jerry yang. any input ...
you know i have friends still working for yahoo!... and i can tell you many of them, when they need vacation, they do not take a day off, you know, they just saying they are working from home.. this happens everywhere at Yahoo! in usa, asia and europe... this is one of the reason why yhoo is so unproductive and uneffecient... it´s a nightmare and i am sure that jerry and sue are not capable to manager their disaster..
Alex Schleber (URL) said:
@Stone - it's only well orchestrated from MSFT's perspective if you ignore ALL of the underlying fundamentals.

That neither MSFT or YHOO have a solid plan going forward. The illusion that scale is going to fix things, or for that matter that a few billion back or forth in the purchase price would make a real difference.

1) The scale argument has been laughable from the beginning. MSFT has or has had all of the scale opportunities in the world and has done NOTHING with them. If 90% of the installed PC base and 100's of millions of Hotmail/Messenger users, etc. don't give you what you need, what will?

2) MSFT has already blown many, many billions on their ill-concieved internet forays (they are ill-conceived because everything within MSFT starts with the premise that the Internet is a problem that must be solved/coopted/defeated).

3) The biggest problem at BOTH MSFT and YHOO is the lack of focus and focused branding (which trickles down into the search monetization and other areas as I've laid out previously). How does combining two unfocused companies make things any better? Things will instead get even worse. Much worse.

I hope and pray at this point that MSFT actually does buy Yahoo because it appears that people will have to see this trainwreck in action to figure this out.
steve said:
First, allmost everthing is for sale (at a good price..). Second, I think Microsoft wants to buy Yahoo at a right price : 31 USD? So I Microsoft wants to buy Yahoo at 31 USD, why they go directly to the shareholders of Yahoo.......
At this moment Microsft can buy Yahoo for 31 USD (at 25 USD I'm not selling).So Microsoft we're waiting for a fair offer (at 31 USD). But we're so tired of this soap, that your offer must be there this summer!
Fernando Alvarez said:
Yhoo must be getting back all their proxy cards, I personally voted by phone, with a majority coming in to withhold all nominees. So they come back to msft and msft, being the bully that they are, says they only want search. If they only want search then take back that open door they left when they originally were in talks for a partial deal and they said they reserve the right for a buyout.

Fernando Alvarez said:
Microsoft to Yahoo Shareholders: Fire Jerry And We Might Bid Again*
Henry Blodget | June 23, 2008 8:44 AM

Looks like their might be some credibility to this headline. So now they come back to msft with Jerry still on board but msft won't bid because he's there, WOW.
anon said:
@Alex: I agree with #3, but you are wrong on #1. Scale in random areas is not the same as scale in search. MSFT cannot directly leverage the windows installed base because the DOJ or European anti-trust guys will put them out of business if they even try. Advertisers want to see traffic from search advertising and for that you need good algorithms and raw traffic volumes. I don't think YHOO or MSFT are terribly behind on the algorithm front, but they simply lack the traffic volumes which makes it hard to get advertisers to pay amounts comparable to what they pay on Google. Combining will give some scale benefits, no question about it.
Ken G. said:
You may have sources, Henry, that deny a buyout deal "is on the table", but listen to their wording very carefully. It depends on what the definition of "is" is. Today, no buyout deal. Tomorrow? Who knows.

Personally, I think the behavior of Yang & Co. has been amateurish, and that's putting it kindly. The behvavior of Ballmer & Co, though, has been equally strange. I never believed that they lost interest in acquiring a company they bear-hugged a few short months ago.

It's a kabuki dance of epic proportions, and eventually these two dance partners will hitch up. Just a feeling.
frustrated said:
where the hell is Icahn!!!! Working behind the scene I hope!
Alex Schleber (URL) said:
@Anon - you are overlooking something that is key to this entire discussion, and tons of other people have also been getting this wrong for a while now. I just posted this comment over on the "Google Train-wreck" post, but it is worth repeating here:

(begin comment reprint)

"Currently the GOOG monetization advantage that comes from their focused execution is somewhere around 50-100%. Note that this has NOTHING to do with "scale". It has everything to do with the advertisers being able to afford higher average bids due to higher average conversions. Period.

*** Conversion is the only thing that ultimately matters to an advertiser.*** Scale is a straw-man. If YHOO or MSFT had equal or better conversion numbers for the same keywords, then advertisers would jump on that. The individual advertiser could care less about the total query share numbers, or total number of clicks, they only care about their ads converting [when they are being shown].

If you place a ***direct response*** ad in your local newspaper, do you care what total percentage of the greater region that newspaper reaches? Nope.

If an ad doesn't convert you can't long afford to run it. In search ads, if you fail to convert the clicks you get, you can be bankrupt before you know it. It's that simple."

(end of reprint)

The total volume of clicks for that keyword on Google, Yahoo, or MSN/Live has little or nothing to do with it. It's simply that at lower conversion rates on Yahoo or MSN/Live, advertisers have a harder time making the economics work for them.

Conversion, conversion, conversion...

I consider anyone who understands this to have a responsibility to renounce the "scale myth" wherever they encounter it. Scale is NOT a proof of concept.

In the U.S., under the Bush admininistration, there has been hardly any pressure on MSFT in the ways you mention. In Europe maybe, but we are talking U.S. search share mostly. If someone says that the DOJ is the only reason that MSFT hasn't been able to hack it in search, they are delusional.

BTW, MSFT has leveraged its base for Windows Media Player semi-successfully in the last 5+ years, and no one at DOJ even made a peep.
Peter W said:
Henry,

Riddle me this - has there ever been a company in US HISTORY that has been offered $45-$50 BILLION DOLLARS (at at 50% plus premium to their then-current stock price) and then seen shareholder value created above that number ???? Some historical context would be interesting.

What gets lost in this debate is that we are talking about ~$50 Billion as if it is a ping pong match - this sh!t doesn't happen everyday. Clearly the yahooligans have overplayed their hand, BUT ... MSFT fundamentally needs this asset.

How do you handicap this deal today?
joeblow said:
Alex,

I agree with your notion of "conversion" but I think you're somehow hybridizing two concepts: relevancy and scale.

You can't ignore them both. Conversion comes either from relevancy (boat owners find boat-owning items of interest with greater efficiency) or more affluent boat owners find them in greater scale (query share).

Yahoo and MSFT say they are on a par with Google in relevancy. I can't prove it myself and I don't know absolutely that it's true, but I believe Decker and she says it is.

That only leaves query share. Thus it's all about scale in every meaningful way... no differently than when I run ads in my local monopolistic rag of a home town paper and get quoted rates based on the circulation for that particular day of the week.

I'm really surprised as you scoffing at scale.
Neek said:
Even if time is of the essence as GOOG continues to innovate, time is still on M's side.

MS can afford to wait, now that Y's damaged goods and someone needs to stick it to Yang, and there's no better way to do that than this. Even after the GOOG deal, stock's still tanking.

The only winner is and will continue to be Google, as they go from strength to strength; while their competitors pummel themselves silly by their own hand. But whether MS planned this from the beginning or not, the advantage is clearly on Ballmer's side.

Plus for Henry. Low to mid 20's for the stock in this round.

Most likely less given more time.
guy (URL) said:
Go to the Alltheweb site and click on the 'New Livesearch - Try It Now' box. Why is Yahoo Search coming up?? Somehting in the pipeline?
ej said:
I hope Techcrunch is right, or their reputation is toast. CNBC was calling them out as being completely wrong.
Fernando Alvarez said:
You guys get upset when we knock Yang and co., Henry says he thinks they can make things happen, yet he says the likely outcome is a msft buyout at about $25. What gives?

I'd rather see my shares drift into the teens than let them go for $25. Why did msft bid $31 when the shares hit $19, thing were clearly headed downhill? If it wouldn't have been msft it would have been a shareholder revolt.
David E said:
Fernando,

You can't be serious...unless you went to Filo and Yang Business School 101.

Yahoo "cut of their hand to spite their finger" and and now they're paying dearly for it, and you're paying dearly for it and I'm paying dearly for it and anyone who owns shares of Yahoo is paying dearly for it. Peter W's post is spot on.

This travesty will easily be used as a case study in econ classes in every major university for years to come. The topic will be called "The 50,000 million dollar nightmare"

At this point I'm watching these events with the fascination of a NASCAR 10 car wreck at 200mph.

Since all of us are guessing anyway, I find it virtually impossible that Microsoft has played the "long con" here and has purposely driven down Yahoo's stock.

Its fallen right into their laps this way. What they do with it is anyone's guess.
Fernando Alvarez said:
David, I agree with Peter's post as well. My post knocks current management (ie.'cuts off their hand to spite their finger')and suggests that the reason msft bid 50% plus premium was to get shareholders on board.

Your right, we don't know what msft will do, but I think shareholders will take their chances rather than give up the company for $25. That would be msft overplaying their hand. As Peter said 'msft fundamentally needs this asset' so it shouldn't get penny wise and pound foolish.
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wynonna (URL) said:
640-802 Microsoft and Yahoo In Talks: Two Sources Say "Search Only, Not Buyout" Good things have just begun. How about this instead!

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