Yahoo Pays the Piper
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Yahoo, whose position improved a
couple of percentage points in the first half-hour of trading, is being held up
by investor confidence that Microsoft will be back after the stock sinks, a
widely held view, or alternatively that Yahoo will align with Google. At around
10 o’clock it was around $23.70.
Yahoo’s co-founder Jerry Yang and
its board succeeded in running Microsoft off over the weekend by demanding more
money than Microsoft was willing to pay, at least $37 a share, or $53 billion,
Microsoft CEO Steve Ballmer said, although Yang really wanted $38, according to
reports, down from $40.
And a Wall Street Journal blog
claimed “Yahoo requested other unspecified costs that Microsoft was unwilling
to accept.” Elsewhere the Journal as well as BusinessWeek said the sides never
reached accord on issues like a regulatory approach or price guarantees should
Microsoft stock fall again.
Microsoft was only willing to up
the ante to $$33 a share, up $5 billion for a total of $47.5 billion,
representing a 70% premium over Yahoo’s stock price of $19.18, when the chase
began three months ago. It is unclear if they were talking cash.
Microsoft even refused to pay
Yahoo the complement of making good on its threat of a proxy fight for control
Ballmer said in the letter to
Yang Saturday giving notice that he was quitting the field that the week’s
negotiations had opened his eyes “for the first time with real clarity on what
is and is not possible” and that he understood that Yahoo would rub lye in its
face if he went directly to Yahoo’s shareholders and do a deal with Google, a
step, he said, that “would make Yahoo undesirable as an acquisition for
So he formally withdrew Microsoft’s proposal to acquire Yahoo like it was
And it appears that Yahoo, which
was unable to find a knight in shining armor anywhere during the last three
months, has run out of alternatives to a deal with Google, its worst enemy
whether it admits it or not.
Yang has promised shareholders a
turnaround without Microsoft – painting a picture of Yahoo revenues up 25% in
2009 and 2010 based on improved ad revenue – and that looks impossible without
a potentially illegal axis with Google.
It is believed the pair will try
sprinkling the word “non-exclusive” over a deal that would have Yahoo outsource
key paid search terms to Google to sell ads around, expecting the incantation
to get them past Justice Department scrutiny.
It has been reported that later
this week they will announce a deal to create a real-time auction system “that
would choose the most lucrative ads for any given consumer query from among
those sold by Yahoo, Google and any of their competitors” – even Microsoft’s
ads could theoretically be sold alongside Yahoo’s search results.
Citigroup has estimated that
outsourcing search advertising completely to Google would increase Yahoo’s cash
flow by a billion dollars a year and that’s what Yang needs to save himself and
The problem is Google and Yahoo
together represent 83% of US search advertising, according to one estimate.
The pair already conducted a
two-week experiment, apparently to the DOJ’s consternation – at least it raised
concerns and questions – but otherwise seems to have produced happy results for
As Forbes observed, “That kind of
cooperating doubtlessly required more information sharing than most rivals do”
and suggested that Google “probably now knows more about Yahoo’s advertising
results than a competitor should.”
And Ballmer in his letter reeled
off a list of problems with such a gambit that are – whatever side of the political
divide you’re on – fairly hard to argue with.
It would, he said, “fundamentally
undermine Yahoo’s own strategy and long-term viability by encouraging
advertisers to use Google as opposed to [Yahoo’s own]
It would also “undermine the
reliance on [Yahoo’s] display advertising business to fuel future growth.”
As a result Yahoo would have
trouble retaining the engineers working on advertising systems that are
important to Microsoft and let Google “set the prices for key search terms on
both their and your search platforms and, in the process, raise prices charged
to advertisers on Yahoo.”
Ballmer said that above and
beyond the legal issues such a policy “seems unwise from a business perspective
unless in fact one simply wishes to use this as a vehicle to exit the paid
search business in favor of Google.”
Microsoft’s stock is rising, up around 2.5%, or 75 cents, like the
smart money said it would. Ballmer said Yahoo would have accelerated
Microsoft’s strategy but now it’s going to build scale organically and
“potentially through strategic transactions with other business partners.”
Observers have been throwing names around like Facebook, AOL and News Corp’s MySpace, all names Ballmer has recently conjured with.
If Microsoft goes
after AOL it would displace a potential deal between Yahoo and Time Warner.
Besides a Google alliance, Yahoo
has appeared enamored lately with the idea of acquiring AOL and giving Time
Warner 20% of the combined company. Google owns 5% of AOL.
Analysts have upgraded Google.
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