Microsoft-Yahoo Discussing "Joint Venture?" Run Away Screaming

Henry Blodget | May 19, 2008 9:16 AM

jerryyang4.jpgCNBC's David Faber said this morning that reports about Yahoo (YHOO) and Microsoft (MSFT) discussing a "search outsourcing deal" or "Microsoft buying Yahoo's search business" are wrong and that the companies are instead discussing a "joint venture." Unfortunately, David also says the talks are "very preliminary" and offers no additional details.

Details would be nice, but if Microsoft and Yahoo really are discussing some sort of "joint venture"--a separate entity owned and managed by both companies--we've already heard more than we need to know. Whatever the JV is, it might just end up being a worse idea that an outright Microsoft acquisition of Yahoo.

Joint ventures in technology almost never work: Too many cooks in kitchen, too many competing goals/incentives, uncertain future ownership and strategic direction--the fatal flaw is different in each case, but the overall structure is usually to blame.

So here's hoping (futile, we know) that what Microsoft and Yahoo are really discussing is spinning Microsoft's Internet business into Yahoo. In any event, the talks are good news for Yahoo--because they show how desperate Microsoft is and because they give Yahoo the ability to play Microsoft and Google off one another. In our opinion, the talks also make it more likely the companies will strike an out-and-out merger deal.

See Also: Microsoft and Yahoo Talking Again! (About a Search Outsourcing Deal, JV, or Other)

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33 Comments

jenkins said:
Only benefit is a possible bidding war between Google and Microsoft over Y's search business.
Henry Blodget said:
Exactly--that is very good news for Yahoo. This JV thing, on the other hand...
FM said:
All you need to know is the chinese maxim ... a JV - same bed, different dreams. MSFT should move on and let YHOO get it's just due.
Bjorn Tipling (URL) said:
Some joint ventures:

The Internet
Iphone
The CW
Hulu
Open Social
Iron Man, the movie
I_am_legend said:
Bjorn those JVs (which may not be legal JVs) almost all have a controlling entity in the endeavor (at any stage), hence why some of those have worked.
Jessica Simpson said:
MSFT is likely proposing that YHOO outsource all of its search ad business to MSFT for a very large guaranteed minimum payment (very large) rather than allow YHOO to pursue the "open outsourcing" plan that it was crafting with GOOG. In that plan (reported on here), any partner could bid for search advertising on the fly. GOOG would likely win every bid but it would make the outsourcing deal palatable to DoJ.

Jim Hillhouse (URL) said:
I wonder why, given that MSFT hasn't had a successful new venture since the Xbox, e.g. Vista, Zune, online anything have all been bombs, its failed online strategy will be helped by acquiring YHOO, which is itself under a good deal of pressure like MSFT from GOOG? I have to ask myself whether MSFT's time and resources would not be better spent fixing what has caused the above problems rather than the distraction of pursuing YHOO?
jack said:
how's about microsoft buy yahoo's search and google buy the rest of yahoo? Then yahoo's value could be in $40-50 range.
Thomas said:
This is likely a ploy by Microsoft to see if it will receive the same consideration as Google for a search-ad deal. Should Yahoo team up with Google and not MS - expect either a major war by MS, or a complete back-off to focus extensive time and money on Live search... although this (in my opinion) is a futile effort to bolster a sagging product.
Bill Johnson said:
How does Blodget still have a job? His BS during the dot.com years cost people a lot of money.....What a pathetic person
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How does Blodget still have a job? His BS during the dot.com years cost people a lot of money.....What a pathetic person
lou badooba said:
MicroSoft did a Joint Venture with IBM once... MicroSoft built OS2 for IBM, stole the code, created NT (grandfather of XP)with it, then pushed IBM out of the PC business...

Good Luck Yahoo... You should have taken the $33 you putz.....
lou badooba said:
MicroSoft did a Joint Venture with IBM once... MicroSoft built OS2 for IBM, stole the code, created NT (grandfather of XP)with it, then pushed IBM out of the PC business...

Good Luck Yahoo... You should have taken the $33 you putz.....
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Here's the best alternative for Yahoo: sell off Panama and it's advertising business to MSFT. Msft gets the advertising scale it wants. Then Yahoo, with its search business can head to Google for monetization. That way everyone wins.

- Yahoo gets to sell off its crappy technology and get higher revenue from Google
- Microsoft gets the scale it desperately desires
- Google gets the extra revenue of monetizing Yahoo.
Rav (URL) said:
The goal of MSFT and GOOG is to slow down and stop each other in their respective strong markets. They are looking at it as a zero-sum game, which is really the problem here. If they just don't compete with each other and enjoy their respective monopolies, they both would do much better. Its easier for GOOG because it has a stronger hand and a growing market. Its more difficult to accept for MSFT as its kingdom is getting smaller and weaker everyday, as its bread and butter markets are maturing.

MSFT's advantage is that it has a much stronger balance sheet and is more diversified. However, this is also the reason that GOOG will do everything in its power to make it difficult for MSFT to get a toehold in the online marketplace. YHOO is just a pawn, means if you will, in the process. So both MSFT and GOOG would want to structure the deal in a way that is exclusive for all practical purposes and leaves out the competitor. GOOG can easily do this because its confident that it can win in a fair and open marketplace due to its technological superiority and network effects. MSFT doesn't have the same confidence. So its trying to come up with a complicated deal which locks up YHOO and allows MSFT to milk YHOO's search marketshare.

Continuing on my analogy in yesterday's comment, now that MSFT can't buy the car, its negotiating the leasing terms with YHOO. Its trying to obfuscate YHOO with the details on down payment, interest rates, monthly installment and so on. But it is missing one important detail. YHOO is the dealer here and MSFT is the hostile buyer, so YHOO will get to decide the terms. And YHOO has some leverage because it already has a friendly and willing buyer in GOOG. There are no angry shareholder lawsuits to fear at YHOO, because the stock has recovered quite well and the board seems to be doing its fiduciary duty by creating alternatives to MSFT bid.

Carl Icahn understands all this very well. The 120M$ that he is up by so far, is peanuts for him. I would be surprised if he makes anything less than 0.5-1B$ when all is said and done. The best position for him to be in is to bid MSFT against GOOG and drive up the YHOO price. GOOG won't mind because it is an insurance policy for its cash printing machine. However, for MSFT it is hard-earned cash accumulated over years that its betting on a coin toss. This is the reason that everytime Ballmer issues a statement about this deal, MSFT stock drops at least 2-3%. This is irrespective of whether he says he is walking or staying.

Most analysts are missing the point that Yang is in a stronger position and its Ballmer who is confused about the next course of action every day. This also explains the whole spectrum of comments coming out of MSFT that leave all options open. I still believe that most likely outcome is either MSFT panicks and pays ~$35 for full acquisition of YHOO in a friendly deal or YHOO signs a long term deal with GOOG in a way that shuts out MSFT from the search marketplace forever. Everything else that happens in the interim would be posturing by different parties.
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