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Yahoo Caught Between Microsoft and Google Offers
Saturday, February 9, 2008
Yahoo's board of directors planned to meet Friday to discuss Microsoft's offer to purchase the multifaceted Web company for $44.6 billion.
CEO Jerry Ya
ng clearly does not want to become part of Microsoft and has been scurrying to put together a deal to counter the offer. One possible white knight was the Japanese telecom company SoftBank, which owns a 41 percent share of Yahoo Japan and 3.9 percent of Yahoo. But Thursday night, SoftBank said it was not interested in making a bid.
The other offer on the table is a bit murkier. According to press reports, Google has offered to take over Yahoo's search business for a sizable chunk of change. Such an arrangement in fraught with antitrust hazards but would give Yahoo more operating revenue.
Execs Pushing for Google
The TechCrunch blog reported that Yahoo's outside consultants are recommending it take Microsoft's offer, but "a contingent of senior executives at Yahoo, who are willing to do literally anything to thwart a Microsoft takeover, are pushing for the Google deal and will present their case at the meeting."
Citigroup analyst Mark Mahaney earlier this week handicapped five possible outcomes for the situation. The most likely is that Yahoo rejects the $31-per-share offer, Microsoft increases the price, and the Yahoo board gives in. But the Google option is well within the realm of possibility.
"We believe the probability of [Google] is greater than financial markets realize," Mahaney wrote. "If Yahoo's board and management want to remain independent, shareholders will insist on a major value-creating strategy to balance the [Microsoft] bid. This may be the only viable strategy, as it could deliver 25 percent-plus accretion to [Yahoo]'s cash flow."
Layoffs, Falling Revenues
Under the Google offer, Yahoo would more than double its revenue from today's four cents per search to an estimated nine cents per search, TechCrunch's Michael Arrington wrote. Yahoo would benefit in the short term from shedding its search operation, but that could be costly for Yahoo employees.
"Nearly a third of Yahoo employees would be shown the door," Arrington wrote. He estimated that Yahoo employs 4,500 people in its search, search advertising, and advertising sales and operations departments.
It could be a deal with the devil, though, because once Yahoo gets into bed with Google it will have no bargaining power for future negotiations. "Down the road, when it's time to renew, Yahoo will have lost all of their leverage since there will be no one other than Google to partner with. Renewal deals won't be so sweet," Arrington wrote.
And by lining up with Google, Yahoo drags both companies into a protracted antitrust review, which could ultimately fail. "In the meantime, however, all the best Yahoo search employees will have left the company to take more stable jobs," Arrington wrote. And if the deal is rejected by regulators, "Yahoo would find itself in a nightmare, having lost scores or hundreds of its best employees and without the Google revenue."
Empty threat
Yahoo will likely use the threat of a Google alliance to extract a higher offer from Microsoft, Arrington wrote, "but the threat isn't (or at least, shouldn't be) real, and both sides know it. Get ready for Microsoft/Yahoo. It's happening."
Greg Sterling, principal analyst with Sterling Market Analysis, agreed that Yahoo's options are extremely limited. "I think Yahoo pretty desperately doesn't want to do the deal with Microsoft. But I don't think Yahoo outsourcing search to Google is viable," he said in a telephone interview. "From a legal standpoint, it's not just what do Jerry Yang and David Philo want to do; the board has a fiduciary obligation to do what's best for shareholders."
If Yahoo doesn't have more than the Google arrangement up its sleeve, it will probably need to accept Microsoft's current offer, Sterling said. "Microsoft is very shrewd, they know this game very well and they won't be intimidated. They pounced at a precise moment," Sterling said. "Unless someone comes through at the 11th hour that can convince shareholders it would be a better option, they'll need to accept Microsoft's bid."
ng clearly does not want to become part of Microsoft and has been scurrying to put together a deal to counter the offer. One possible white knight was the Japanese telecom company SoftBank, which owns a 41 percent share of Yahoo Japan and 3.9 percent of Yahoo. But Thursday night, SoftBank said it was not interested in making a bid.The other offer on the table is a bit murkier. According to press reports, Google has offered to take over Yahoo's search business for a sizable chunk of change. Such an arrangement in fraught with antitrust hazards but would give Yahoo more operating revenue.
Execs Pushing for Google
The TechCrunch blog reported that Yahoo's outside consultants are recommending it take Microsoft's offer, but "a contingent of senior executives at Yahoo, who are willing to do literally anything to thwart a Microsoft takeover, are pushing for the Google deal and will present their case at the meeting."
Citigroup analyst Mark Mahaney earlier this week handicapped five possible outcomes for the situation. The most likely is that Yahoo rejects the $31-per-share offer, Microsoft increases the price, and the Yahoo board gives in. But the Google option is well within the realm of possibility.
"We believe the probability of [Google] is greater than financial markets realize," Mahaney wrote. "If Yahoo's board and management want to remain independent, shareholders will insist on a major value-creating strategy to balance the [Microsoft] bid. This may be the only viable strategy, as it could deliver 25 percent-plus accretion to [Yahoo]'s cash flow."
Layoffs, Falling Revenues
Under the Google offer, Yahoo would more than double its revenue from today's four cents per search to an estimated nine cents per search, TechCrunch's Michael Arrington wrote. Yahoo would benefit in the short term from shedding its search operation, but that could be costly for Yahoo employees.
"Nearly a third of Yahoo employees would be shown the door," Arrington wrote. He estimated that Yahoo employs 4,500 people in its search, search advertising, and advertising sales and operations departments.
It could be a deal with the devil, though, because once Yahoo gets into bed with Google it will have no bargaining power for future negotiations. "Down the road, when it's time to renew, Yahoo will have lost all of their leverage since there will be no one other than Google to partner with. Renewal deals won't be so sweet," Arrington wrote.
And by lining up with Google, Yahoo drags both companies into a protracted antitrust review, which could ultimately fail. "In the meantime, however, all the best Yahoo search employees will have left the company to take more stable jobs," Arrington wrote. And if the deal is rejected by regulators, "Yahoo would find itself in a nightmare, having lost scores or hundreds of its best employees and without the Google revenue."
Empty threat
Yahoo will likely use the threat of a Google alliance to extract a higher offer from Microsoft, Arrington wrote, "but the threat isn't (or at least, shouldn't be) real, and both sides know it. Get ready for Microsoft/Yahoo. It's happening."
Greg Sterling, principal analyst with Sterling Market Analysis, agreed that Yahoo's options are extremely limited. "I think Yahoo pretty desperately doesn't want to do the deal with Microsoft. But I don't think Yahoo outsourcing search to Google is viable," he said in a telephone interview. "From a legal standpoint, it's not just what do Jerry Yang and David Philo want to do; the board has a fiduciary obligation to do what's best for shareholders."
If Yahoo doesn't have more than the Google arrangement up its sleeve, it will probably need to accept Microsoft's current offer, Sterling said. "Microsoft is very shrewd, they know this game very well and they won't be intimidated. They pounced at a precise moment," Sterling said. "Unless someone comes through at the 11th hour that can convince shareholders it would be a better option, they'll need to accept Microsoft's bid."
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