Microsoft – Three Weeks Or Else!
Since Microsoft offered to buy Yahoo! for $44.6 billion, interesting times have been ours to enjoy here in the land of the search engines. On April 5 2008, Steve Ballmer stepped up the game by giving Yahoo! 3 weeks to make a decision on the 44.6 billion dollar offer or they’ll bypass the board and go directly to shareholders.
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In response to this, Yahoo! made a couple of announcements:
- They’ll run a two week test of Google Adsense on Yahoo.com in the US. The test is limited to approximately 3% of Yahoo! search queries. With this, Yahoo!’s board is supposedly “exploring strategic alternatives to maximize stockholder value, including exploration of potential commercial business arrangements.”
- They announced that Yahoo! was very close to securing a deal with AOL (more on this below in the other scenarios section).
Recall that former Yahoo CEO Terry Semel was reportedly in talks to buy AOL in late 2006. How far those talks got is anyone’s guess, but the relative valuations of the companies are bound to be a sticking point in any deal that includes Yahoo stock. Around the same time, many observers thought that Yahoo would complete a deal for Facebook. It’s anyone’s guess why that deal died, but it was probably a case of Yahoo undervaluing Facebook and being unwilling to use too much of its $3 billion cash reserve to sweeten the deal. The fact that Yahoo has been unable to complete major home run acquisitions in the past few years is one key reason why they’re facing a takeover themselves today. Compare Google’s acquisition prowess: they acquired YouTube for only $1.65 billion in stock, and today YouTube propels Google to a 34% market share in streaming video. In January alone, 78.5 million viewers viewed a stunning 3.25 billion videos on YouTube.com. Failing to pull the trigger on major acquisitions has been one of the reasons Yahoo has fallen behind its main rival.
In the coming weeks, things are sure to get a lot more interesting. This article will explore several possibilities that could unfold in the coming weeks.
The Microhoo option
The two-week Google advertising deal could be a way to get Yahoo! to increase their $44.6 billion takeover offer. Rumor has it the Yahoo! board is gunning for approximately $40 per share (incidentally, Wall Street thinks Yahoo! will get in the $34 to $35 per share range). Yahoo!, in responding to the “three weeks or else” threat, stated it wanted more money for the purchase of Yahoo! to move forward. Here are some excerpts from the letter:
- “Our position is simply that any transaction must be at a value that fully reflects the value of Yahoo, including any strategic benefits to Microsoft, and on terms that provide certainty to our stockholders”.
- “…with respect to your proposal, we have presented our three-year financial and strategic plan to our stockholders, which supports our Board’s determination that your unsolicited proposal substantially undervalues Yahoo.”
- “We continue to believe that your proposal is not in the best interests of Yahoo and our stockholders.”
Yahoo!’s recent SEC filing seemed to signal that Yahoo!’s management realizes acquisition is likely to happen. (For more information on this, take a look at my last month’s article, Is Microhoo a Done Deal?). Yahoo!’s latest attempt to bargain with Microsoft over the buyout price seems consistent with the SEC filing. I’d be looking for more dough too if I were a dominant player on the Internet scene and responsible for significant innovations in the portal, search engine, and the online advertising business.
Yahoo! is scheduled to have its first quarter earnings call at 5pm ET (2pm PT) tomorrow and it will certainly shed more light on this scenario. Stay tuned.
A Google-Yahoo partnership
Many people (including the Microsoft camp) have cited antitrust concerns with this possible scenario. Google and Yahoo! account for a large portion of the search market, and a merger would give Google control of most of the market. But, the antitrust argument would have weaker legs to stand on with a limited search outsourcing deal as it would not encompass all aspects of online advertising; namely, paid search, organic search, and display advertising. For regulators to block a paid search deal, they’d have to be concerned that paid search (a single component of online advertising) is a distinct marketplace. A scenario like this could go through. Here are the reasons:
- U.S. regulators may view the tech market as dynamic and fast-changing and may abstain from blocking any joint venture. (Europe tends to be a little more conservative and the deal may have some problems clearing on that side.) The US Justice Department has a reputation for approving deals that antitrust experts consider borderline. A recent example is the merger of XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc. (the only two US satellite radio companies).
- There’s obviously a long history of companies outsourcing paid search. Google currently powers paid search for AOL, Ask.com, and MySpace, and none have resulted in antitrust battles. Also, back in the day, Yahoo’s Overture powered paid search for Microsoft.
- It’s an auction and prices are not determined by Google (theoretically).
Two other options
Both of the scenarios below are considered unlikely but are worth mentioning as they’ve come up a fair bit as long shot candidates. For the big time gamblers out there, lay a few bucks (or 0.05 of a share of Google stock) on:
- Time Warner Inc. recently stepped up talks over creating an alternative to Microsoft’s offer. The talks center on a deal that would fold Time Warner’s AOL Internet unit into Yahoo. While many outsiders feel that combining AOL and Yahoo! would be very complicated, eager CEOs under the gun have been known to make similar big deals and let the rest of the team figure out the nasty details. The history of AOL and Time Warner doing just this, however, must be ringing in everyone’s ears to this day. That history alone lowers the probability that this kind of deal will happen.
- News Corp. has recently moved to the Microsoft camp. If Microsoft does include News Corp. in a deal, the companies would gobble up different parts of Yahoo. Microsoft would acquire search and advertising technology assets, and News Corp. would acquire many of the online media properties. Other sources have suggested that News Corp. wants in because MySpace has peaked and they’re thinking it may be a good time to divest.
Yahoo will likely lose its fight to stay independent. The marketplace demands a viable competitor to Google and Microhoo may be the only reasonable option.
Mona Elesseily is director of marketing strategy at Page Zero Media, focusing on paid search campaigns and conversion improvement. She’s also the author of Page Zero’s Mastering
Panama: A special report on Yahoo!’s new search marketing platform (August 2007). The Paid Search column appears Mondays at Search
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