Microsoft’s unfriendly, slow-motion effort to take over Yahoo may ironically be riskiest for the pioneering Internet company.
Yahoo chief Jerry Yang hasn’t yet pulled an ace out of his pocket to get a higher bid than Microsoft’s. Meanwhile, Yang’s problems are mounting. At least seven shareholder groups have filed suits against Yahoo for shunning Microsoft’s $44.6 billion offer, which works out to $31 a share.
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And Yahoo is essentially out of options as the clock ticks.
This week, Yahoo’s talks with News Corp. broke down. News Corp. chief Rupert Murdoch, also a predator known to snap up floundering companies like Yahoo, passed on a deal. “We’re not going to get into a fight with Microsoft, which has a lot more money than us,” Murdoch said Monday.
Talks with AOL haven’t developed either. Under one scenario Yahoo would avoid being acquired by buying AOL for cash and stock.
“This wouldn’t please [AOL parent] Time Warner’s shareholders,” says Jeffrey Lindsay, an analyst at Sanford Bernstein. “And AOL is another challenged asset.”
“Yahoo is in denial that it has a way to get to $40 (per share)” says Lindsay, referring to the sweetened stock price that Yahoo is after. “Yahoo’s reaction is more negative than expected, given recent performance.”
The problem, says Lindsay, is that Yahoo is the largest player in the online conventional display ad business. And it’s heavily exposed to a crumbling economy.
He expects dismal financial results when Yahoo reports financial results from the current quarter next month.
“Yahoo’s management is distracted,” he adds. “Yahoo is much more affected by a downturn than Google.”
Yahoo’s problems can only get worse. As ad revenues dwindle, Yahoo has less of an argument in its efforts to get a higher price.
“Microsoft may be prepared to make an even lower offer,” says Lindsay. “Time is not on Yahoo’s side.”
Nevertheless, Yahoo attempted to stop the clock last week by postponing a key deadline for Microsoft to nominate a slate of candidates to replace Yahoo's current board. But Yahoo can't extend the deadline forever: The company has to hold an annual shareholders meeting no later than July 12.
Microsoft hasn’t yet gotten sucked into the demand for a higher bid, despite coveting Yahoo, adds one analyst. CEO Steve Ballmer is gunning for a bigger share than its 3 percent of the search ad market against Google’s dominance. He says Microsoft will gain market share against Google if it’s his “last breath.”
The mathematics of acquiring Yahoo, Ballmer says, are simple: More searches equals more advertisers, which equals more bidding on key words, which equals more revenue. “The great companies either move forward or they become less relevant,” he told a conference of web developers in Las Vegas last week.
Not that Microsoft is immune to failure. The bid for Yahoo is Microsoft’s biggest deal by far, eclipsing its $6 billion acquisition of the online advertising firm aQuantive last year.
Swallowing up Yahoo would be no small feat, given the wildly different cultures, technology and locations of the two companies. But the prize is substantial: an advertising search ad market slated to grow from more than $40 billion in 2007 to nearly $80 billion by 2010.
A slow, steady pace is Microsoft’s core strength. Even after acquiring Yahoo, Microsoft won’t be mashing the two companies together. That would be “reckless,” chief software engineer Ray Ozzie told the Financial Times. Ozzie doesn’t want to disrupt Internet users or advertisers.
“Microsoft isn’t entering something it hasn’t thought through,” says Gartner analyst Andrew Frank. He said Microsoft executives are long-term thinkers who apply best practices.
Meanwhile the online search ad business is shifting, he adds. Big companies like Johnson & Johnson and Kraft are moving more aggressively into Web advertising. And Google is not close to Madison Avenue. This shifting marketplace “may make Microsoft’s offer more attractive to Yahoo’s shareholders,” he says.
Yahoo continues to shore up its defenses. Recently, Yahoo set up severance plans that protect its employees, discouraging them from defecting.
CEO Jerry Yang — along with president Susan Decker — are allotted 24 months salary if Yahoo is sold. This is only another form of poison pill, adds Lindsay. “The management is trying to preserve control of the company.” Yahoo’s control is quickly slipping away.