Aftermath: Yahoo Still Open To Deals; Stock Largely Survives

With the first day over since Microsoft bailed on Yahoo, I find myself
chuckling with agreement over Valleywag’s "Post-Microsoft,
Yahoo shares ‘plunge’ from $19 to $24.60" headline. Yahoo fared far better
than many had predicted. Part of that may be due to thoughts that it is not all
over yet for a Yahoo-Microsoft marriage or some other deal. Certainly Yahoo CEO
Jerry Yang is putting that idea out there. Plus, there are debates over who was
more serious about really negotiating, an investor lawsuit being prepared, Yahoo
stressing that it is not selling out to Google, and Yahoo’s annual meeting finally
gets scheduled: July 3. Below, a rundown on the past day’s news, for those
looking for signal from the noise.

Let’s do some numbers first. Yahoo closed at $24.37 per share yesterday, down
15 percent. That’s well above the $19 it traded at before the Microsoft deal was
ever announced. Microsoft closed at $29.08 per share, practically unchanged with
a 0.16 percent drop. Google was the big winner, closing at $594.90, up 14
percent.

Now let’s do the news….

The “Microsoft Blew It” View

How Not to Make a Deal from Andrew Ross Sorkin at the New York Times had me
nodding in agreement over how this failure feels far more down to Microsoft than
Yahoo. Be sure to give the entire story a read.

Like I said on Sunday, not to pay just a bit more [relatively speaking] to get Yahoo, when Microsoft
itself had made the purchase seem so important? Writes Sorkin:

But most of all, Mr. Ballmer didn’t realize — though he had been warned by
his advisers — that when you make a blockbuster unsolicited offer, you must be
prepared to win. Not necessarily win at any cost, but win at a cost within
reason. (Just ask Rupert Murdoch.) And the truth is, the few extra bucks that
Yahoo wanted in order to save face was within Microsoft’s ability to pay
without wrecking the economics of the deal.

True, Mr. Ballmer raised his bid once, by $2 a share from $31. But as his
advisers knew—and Yahoo’s investors were saying out loud — he needed to cough
up at least another dollar a share, bringing his bid to $34 a share. If he had
done so, he probably would have won a proxy contest.

Bill Miller, the money manager at Legg Mason, which is one of Yahoo’s
biggest investors, said as much. “Had there been a full deal on the table, a
hostile deal, at $34 or $35, we would have had to take a look at it,” Mr.
Miller said in frustration. But that would have meant that Mr. Ballmer would
have to go through with a proxy fight, as he had threatened to do….

To hear Microsoft’s aides tell it, Mr. Ballmer never quite made up his mind
about this deal. The more Yahoo resisted, the more he lost heart. He asked
during meetings and conference calls, “Should we just forget it?”

Sorkin also covers how Ballmer — after saying this was so important to his
company — seems to have discovered not everyone agreed and perhaps lost faith in
the idea:

Microsoft has tried to spin its reversal as a show of “discipline” and
“self-control.” But what it really shows — painfully — is Mr. Ballmer’s
indecisiveness about this deal. Even one of his aides described Microsoft’s
approach as “amateur hour.”

Mr. Ballmer miscalculated from the start. He misread his own shareholders,
who hated the deal and drove down Microsoft’s stock. That decline, in turn,
diminished the value of Microsoft’s cash and stock bid. (Microsoft stock lost
$24 billion in value thanks, in part, to its Yahoo bid.)

Some of Microsoft’s most valued employees hated the deal too, arguing it
was a mistake. And Mr. Ballmer also didn’t appreciate that he was going to
have to negotiate against himself — and against a target that would make the
economically irrational decision of rejecting an offer that was more than 70
percent above the market price.

I said similar things in reaction to the

How Yahoo (YHOO) Blew The Microsoft (MSFT) Deal, Part 1 post at Silicon
Valley Insider that seems to ascribe failure over to Yahoo. I

commented:

"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."

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 to the "long term" approach it has been
taking the past five years toward a dropping marketshare.

Did Yang Fail Shareholders To Stay Independent?

Still, Yahoo doesn’t get off the hook, especially coming under fire for trying to stay out of Microsoft’s embrace even if that might have delivered more money for
shareholders, as some feel it would have. Writes Sorkin:

Yahoo made mistakes too — lots of them. Its entrenched management team, led
by Mr. Yang, did everything in its power to thwart the bid by Microsoft, which
Yahoo has always viewed as the Evil Empire. Many on Wall Street find it hard
to believe that Yahoo negotiated in good faith, despite assurances that it
wanted to reach a deal. Mr. Yang’s comment, when he described the talks as a
“distraction,” says it all.

Yahoo came up with a three-year strategy plan to justify a higher valuation
for itself. Virtually no one took it seriously, however. Yahoo made it clear
that it was willing to damage itself before allowing Microsoft to win a
hostile battle.

Yahoo Still Open To Dates, Marriage

Meanwhile, is it really all over for a deal?
Yahoo Chief Yang Open to Bids, Even From Microsoft from Bloomberg says Yang
is open to new bids from Microsoft or anyone. Actually, the headline says that.
Yang just is quoted as saying they’ll listen to offers:

Yahoo continues to speak with other companies
about ways to increase its value, Yang said today in a phone interview with
Bloomberg News. While the Sunnyvale, California-based company isn’t for sale, it
would listen, “should somebody else come back someday and want to buy the
company,” he said.

But sure — Yahoo would talk to Microsoft
specifically, too. From
Reuters:

Yang said on Monday it was Microsoft Corp that left the negotiating table
and he was still open to discussing a deal with the software maker. "We were
negotiating a way to find common ground and then on Saturday they chose to
walk away," Yang told Reuters in an interview. "They started it and they
walked away."

Asked if Yahoo would still leave a door open to talks, Yang said: "If they
have anything new to say, we would be open … I am more than willing to
listen."

Still, Yang added he’s not expecting a call —
that he’s not viewing Ballmer’s walkout as a negotiating tactic, but is taking the
letter at "face value."

From

BusinessWeek:

A source close to the matter took pains over the weekend to insist that
Microsoft views the deal as dead. But the source also didn’t completely rule out
the possibility. For his part, Yang doesn’t rule it out either, though not at
Microsoft’s stated price. "If Microsoft says, ‘Hey, we’ll come back and meet
your price,’ then we’ll obviously have to talk," says Yang. "There’s no lack of
willingness for us to explore anything that maximizes shareholder value."
Yahoo’s board countered Microsoft’s most recent terms with an offer of $37 a
share.

Who Was (& Wasn’t) Serious In Negotiations?

How about those negotiations? There’s
new debate over who offered whom what and when or if anything. Confused? Well…

Yahoo Disputes Microsoft’s
Non-Negotiation Claims at CNBC says that the $33 per share offer outlined in
Ballmer’s letter ending negotiations was never explained properly to Yahoo:

This source said there was never a "formal offer" of
$33, just a suggestion that Microsoft would be willing to come up "a couple
of  bucks" on the offer.  Nothing, he says, was every [sic] put in writing.   When
Yahoo bankers wanted more details, even a written offer, details on whether
the new offer would be all-cash, or cash and stock, or a collared offer of
some kind to reduce the downside if Microsoft shares lost value, it was
Microsoft that refused to respond.

"That they were ‘dumbfounded …’ It doesn’t make any
sense," this source said. "They were incredibly and purposely vague."

The New York Times also has

an account of Microsoft being stubborn, this time from Yang himself:

He said he was open to selling Yahoo to Microsoft all along, but that

Steven A. Ballmer, Microsoft’s chief executive, and his deal makers
ultimately declined to negotiate and withdrew their proposal on Saturday with
little explanation.

“They chose to walk away after we put a price on the table, and they didn’t
want to negotiate,” Mr. Yang said. “From my perspective, we were open all
along to selling to Microsoft. We just feel Yahoo, either stand-alone or with
Microsoft, is worth more than what they put on the table.”

Still, the article seems to suggest Yahoo did get the $33 offer more formally
than CNBC’s unnamed source said:

Yang’s account conflicts with that of Microsoft’s advisers and executives.
They have said that they received no counteroffer from Yahoo for three months,
after Microsoft’s deadline to consummate the deal had expired. They also say
that Mr. Yang and his board settled on a price of $37 a share and ultimately
refused to budge.

Microsoft had raised its initial bid to $33 a share when Mr. Yang and his
co-founder, David Filo, met with Mr. Ballmer and other Microsoft executives at
the Seattle airport on Saturday. After that meeting, Mr. Ballmer made public a
letter to Mr. Yang withdrawing the offer. “I am disappointed that Yahoo has
not moved towards accepting our offer,” he wrote.

In the interview Monday, Mr. Yang and Roy Bostock, Yahoo’s chairman, said
that throughout the process they were open and receptive to a merger with
Microsoft. Mr. Yang said that he spent personal time alone with Mr. Ballmer
but that they were ultimately unable to bridge their differences….

Yahoo Would Have Gone For Less?

The Wall Street Journal
suggests,
as Silicon Alley Insider

highlighted, that the $37 Yahoo put out there was expected to be negotiated
downward:

"We said, considering all of these hard data, what we should
do is say we think a fair value for the company is $37. It was not a
take-it-or-leave it statement," Mr. Bostock [Yahoo’s chairman] said. He said
Microsoft did not respond to that price other than to withdraw its offer.

One person familiar with the matter said Yahoo’s board saw
$37 as a starting point in what was expected to be a negotiation. Some board
members may have been prepared to accept a lower price from Microsoft —
perhaps as low as $34 — if Microsoft had continued negotiating, this person
says.

Google Doesn’t Mean Yahoo’s Selling Out

The article also covers what I’ve written about before, that those assuming a
deal with Google means Yahoo is bailing from paid search are probably making
wide assumptions. Said Yang:

“Anything we might do with Google would allow us to maintain the ability to
compete in what is important to us,” Mr. Yang said. He declined to say whether
Yahoo would pursue such a deal.

That deal, which some reports said would be announced this week, might not happen soon. Via News.com, Yahoo, Google search ad tie-up loses urgency from MarketWatch has an unnamed source saying that the “urgency” has waned and a deal is unlikely to be announced this week.

Unhappy Investors

Meanwhile, what about those Yahoo investors? At least one’s not happy:

“I am extremely angry at Jerry Yang and at the so-called independent
board,” said Gordon Crawford, portfolio manager for Capital Research Global
Investors, which owns 6 percent of Yahoo. The firm’s parent company owns a
total of 16 percent of Yahoo, making it the largest shareholder.

Mr. Crawford questioned a statement from Mr. Bostock in which he said the
company was pleased that so many shareholders had supported its position.

“I would love to know who these shareholders are,” Mr. Crawford said. “It’s
none of the ones that I talked to today. Everybody I talked to would have sold
their stock at $34.”

Yahoo Holders
Turn Up Heat After Microsoft Deal Talks Fail from the Wall Street Journal
has more big shareholders talking like that.

A manager at another major shareholder said the firm was
"comfortable with Microsoft’s price," and had communicated to Yahoo last week
that it would accept a deal in the approximate range of $33 or $34 per share.

A manager at a third major Yahoo shareholder said some
investors were pressing Yahoo to "reopen the dialogue" with Microsoft about
possible deals. "The shareholders are pretty irate," the manager said.

And yes, at least one lawsuit is to be filed. From

Fox Business:

Two public pension funds … will pursue their consolidated class action
lawsuit against Jerry Yang and the other members of the Yahoo board of
directors to obtain redress for the Yahoo directors’ breach of their fiduciary
duties in thwarting a merger proposal by Microsoft Corporation….

The actions taken by Jerry Yang this past weekend confirm what the Detroit
Funds alleged in their original complaint: "The Yahoo Board, in its
desperation to pull off a ‘Just Say No to Microsoft’ defense, is fighting off
a non-coercive 62% premium offer by pursuing all manner of value-destructive
third party deals." …

Bernstein Litowitz partner Mark Lebovitch stated, "If Jerry Yang wants to
understand why Yahoo shareholders are so unhappy, he should go to his new
favorite search engine — Google — and look up the phrase ‘breach of
fiduciary duty.’" "Yang’s willingness to put the heart of Yahoo’s search
function in Google’s hands to preclude a Microsoft bid representing a 70%-plus
premium demonstrates that Yang was never negotiating in good faith," noted
Lebovitch.

I’m not a stock guy, but I love that Microsoft was offering a "70% premium"
to Yahoo. That assumes Yahoo was actually only worth $19 per share. Clearly, it
was not. Clearly it was not because Microsoft put in a bid that valued it well
above that. No company has a fixed value of what it is actually worth, since
that worth is determined by the market itself. But I’m sure the lawyers will get
a premium.

July 3: Yahoo’s Annual Meeting

Well, the investors can have their say another way. Yahoo’s

finally holding its long-delayed annual meeting, to happen on July 3. Will
July 4th prove to be Independence Day for Yahoo if the board is retained, or
will there be a new revolution to come? Yahoo may see hedge fund heat after Microsoft bid from Reuters also has more how some hedge funds might try to overthrow the board.

For more, see these past articles from me:

• Leaving Las Yahoo:
  Microsoft’s $5 Billion Mistake?
• Yahoo Next Steps:
  Google Deal, AOL Purchase & Pleasing Investors

And related discussion on Techmeme
here and
here.

Postscript: See Jason Kottke’s Yahoo stock plunges? post for a succinct look at how Microsoft’s lost value since the deal was announced, while Yahoo has gained.