Posted on June 12, 2008
Filed Under Valley Drama |
Yahoo as we knew it died today when it announced that talks with Microsoft about some sort of acquisition have formally been ended and that it was instead entering into a search advertising deal with rival Google.
Here is my summary and analysis of the news.
After Microsoft’s initial offer to acquire Yahoo was rebuffed, the company entered into a second round of discussions.
The Redmond software company reportedly informed Yahoo that it had no interest in discussing a full acquisition, even at the previous offer price.
The new round of discussions with Yahoo contemplated a transaction related only to Yahoo’s search business.
Those conclusion of those discussions without an agreement today.
According to Microsoft’s press release addressing the matter, it believed the alternative transaction it was proposing would have “delivered in excess of $33 per share to the Yahoo! shareholders.”
Yahoo’s indicates that Yahoo did not see the same value in Microsoft’s new proposal:
With respect to an acquisition of Yahoo!’s search business alone that Microsoft had proposed, Yahoo!’s Board of Directors has determined, after careful evaluation, that such a transaction would not be consistent with the company’s view of the converging search and display marketplaces, would leave the company without an independent search business that it views as critical to its strategic future and would not be in the best interests of Yahoo! stockholders.
The Google Deal
Although it stated that an “independent search business” was crucial to its interests, Yahoo’s management and board apparently believed that Google is better-equipped to help Yahoo’s search advertising business than Yahoo is itself.
A few hours after the US financial markets closed, Yahoo that it had entered into a non-exclusive search agreement with Google:
The agreement enables Yahoo! to run ads supplied by Google alongside Yahoo!’s search results and on some of its web properties in the United States and Canada. The agreement is non-exclusive, giving Yahoo! the ability to display paid search results from Google, other third parties, and Yahoo!’s own Panama marketplace.
Under the terms of the agreement, Yahoo! will select the search term queries for which – and the pages on which – Yahoo! may offer Google paid search results. Yahoo! will define its users’ experience and will determine the number and placement of the results provided by Google and the mix of paid results provided by Panama, Google or other providers. The agreement applies to paid search and content match and does not apply to algorithmic search. The agreement also applies to current partners in Yahoo’s publisher network.
Yahoo anticipates that the agreement will provide it with “$250 million to $450 million in incremental operating cash flow” in the first 12 months.
Yahoo and Google will wait three months to implement the agreement as they are voluntarily seeking an informal “okay” from the US Department of Justice, clearly in an effort to ward off any antitrust concerns.
And in what is likely to spark even more ire on the part of shareholders already infuriated by Yahoo’s recently-implemented severance plan, the agreement may be terminated by either party “in the event of a change in control of either party” provided that Yahoo pays Google $250 million “subject to reduction by 50 percent of revenues earned by Google under the agreement.”
The long-term outcome of these events is unknown, but the short-term outcome is crystal clear: this is going to get ugly.
Yahoo is already facing lawsuits from angry shareholders who believed that the Yahoo should have taken the money and run. I doubt that Yahoo’s prediction that the agreement will add $250 million to $450 million to operating cash flow is going to appeal more to shareholders than Microsoft’s $47.5 billion offer.
To the contrary, this will probably only make them angrier.
Billionaire investor Carl Icahn, who is leading a proxy war to oust Yahoo’s board and Yahoo CEO Jerry Yang, has ratcheted up the rhetoric about Yahoo’s board recently, arguing that its members may be “personally liable” for their actions.
While it remains to be seen if such a position would stand up in court, Yahoo’s eagerness to jump into bed with the company that has been the source of its troubles - Google - while refusing to accept a significant acquisition offer from a company also trying to compete with Google - Microsoft - is quite telling.
The fact that Yahoo reportedly turned down a $40/share offer from Microsoft in 2007, as alleged in an ongoing lawsuit, seems to give credence to the notion that Yahoo’s board simply didn’t want to be acquired by Microsoft.
But putting the lawsuits aside for a moment, I think the most important message in Yahoo’s deal with Google is essentially: “we have failed in search.”
While one might argue that because the deal is non-exclusive and gives Yahoo a significant amount of control, it provides Yahoo with a best of both worlds scenario under which it can boost short-term performance by letting a more capable Google assist while at the same time having the ability to work on improvements to its own search advertising business.
I think this is a foolish argument. Once Yahoo hands parts of its search business off to Google and is able to achieve better financial results than it could on its own with minimal effort and investment, it will have relieved itself of a considerable amount of the pressure that ironically served as one of the few sources of motivation for improvement.
Considering that Yahoo has not been able to successfully turn its ship around after years of trying and now an even more rapid exodus of key employees, I doubt that the Google agreement is going to provide any more motivation for Yahoo’s management and board to accept that the company’s long-term survival is at stake.
To be sure, this deal is by no means that Yahoo has taken its final breath. But I think there’s a very good chance it will be looked back upon as the death of what Yahoo once was and eliminates all possibility of it ever being able to recapture some of its past glory.
For this reason, the story of Yahoo serves as a very interesting case study.
While there is no doubt that Yahoo has suffered from significant internal problems, including poor management, the truth is that even though it was beaten in its original core business of search by a thoroughly more innovative Google, Yahoo always remained a fairly strong business in absolute terms.
Unfortunately, we live in a world of relativity and Wall Street found more to like in Google. This, of course, came at Yahoo’s expense.
To its shareholders, Microsoft’s offer represented perhaps the best and last near-term opportunity for the company to turn their lemons into lemonade. After watching the failures of past inititives that were supposed to turn Yahoo around, such as Panama, it’s hard to blame them for wanting to .
Yet a man who I believe to be a weak and irrational leader (Jerry Yang), coupled with a team of overpaid board members logically threatened by the possibility of losing their excessive compensation packages, made an emotional decision that left Yahoo shareholders holding stock in a company that has clearly lost its way.
In its desperation, Yahoo has capitulated to the will of its largest competitor, not only handing them a part of their business but much of the company’s pride, dignity and hope.
While the former is costly, the latter are priceless.
Regardless of whether or not you believe that Yahoo’s deal with Google makes sense, such a capitulation is no doubt symbolic and in the final analysis, almost never positive.