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Yahoo/Microsoft Non-Deal Puzzling

04-May-08 11:44 pm EDT Leave a comment Go to comments
Yahoo ‘mum’ on Microsoft Offer as deadlines passes. Pundits now try to figure out what’s next for both companies – and it might yet end up being a shotgun wedding.

Talk of a shareholder revolt has sparked in the wake of failure for both Yahoo and Microsoft; each unable reach an agreement on a merger deal. A number of other shareholders (holding more than 2M voting Yahoo shares) is planning a campaign aimed at pressuring Yahoo to pursue a deal with Microsoft, and in good faith this time instead of allegedly maintaining a pretense during negotiations over the past several weeks. And I can’t say I’m all that surprised.  $37 (USD, also about he same in CDN, since parity with Canada’s currency was reached a while ago) is a very reasonable offer for Yahoo, which has struggled in recent months to advance its revenue.  Indeed, many analysts can’t seem to figure out what Yahoo’s strategy is exactly, although it’s a safe bet a handful of Yahoo’s shareholders and possibly even a majority on board of directors, simply don’t like Microsoft and are eager to forge a deal with one of its competitors.  This is almost certainly a minority view amongst shareholders, the majority of whom are certainly more interested in advancing the company’s stock price.  And unless a realistic strategy to do that manifests very soon, Yahoo’s board could be in trouble with its constituency.

The analysis of Yahoo’s strategy (assuming one exists and this isn’t just some ridiculous incarnation of anti-Microsoft sentiment) appears to center around driving Microsoft’s offer higher.  Trouble is, of course, the offer’s off the table at the moment, signaling probable failure of this strategy and it’s even worse for shareholders – as Yahoo’s shares are expected to drop by at least $8-$9 per share tomorrow morning as the market absorbs the news of "no deal" (which was a surprise, since a deal was anticipated).

"Shareholders didn’t even get a chance to vote on the deal, but the board negotiated on our behalf and not in good faith,"
     —Eric Jackson, Leader of Yahoo shareholder group "Plan B"

Unfortunately (and I’m speaking as someone who’s career has been and will continue to be hugely tethered to Microsoft’s success), Microsoft needed this deal.  The software giant just hasn’t been able to leverage the formula that helped build its original success in the technology market to repeat that performance with the Internet.  The good news is, the Internet is both relevant and key to Microsoft’s growth, but the company isn’t going to just disappear because the Yahoo deal didn’t happen.  It does mean, however, that the company will need to do the hard work of advancing new innovations and strategy day-by-day to ensure that it can compete and even beat Google at the Internet game.  Internet search is a hugely significant part of that game, but as the leadership of both companies have said in the past – everything can change very quickly in the tech sector.

And we might see just that in the weeks ahead if the deal is resurrected.  Some have speculated that Microsoft’s walking away from talks is actually part of a ploy to get shareholders to pressure its board to take the deal – betting that Yahoo’s leadership doesn’t actually have a coherent plan afoot to increase share price (AOL/Time Warner, also in talks with Yahoo, would likely need to at least match Microsoft’s offer in the near term to be practical).  And even if the supposed ploy were to fail, there’s still the option of attempting a hostile takeover, although Microsoft CEO Steve Ballmer has downplayed that idea in recent days, citing a recent deal between Yahoo and mutual Internet advertising rival Google as being contrary to the interests of both Microsoft and ultimately Microsoft’s interest in Yahoo.

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Terry Glavin

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