Microsoft’s original offer was $31 per share in a combination of cash and stock. That represented a premium of more than 60 percent on Yahoo’s stock price. Yahoo, however, insisted the price was too low. Though the statement was clearly a negotiating tactic, it was also very clear that Yahoo CEO Jerry Yang did not want to see his company fall into the hands of the software giant, and he was willing to do just about anything – even strike up a deal with arch rival Google – to prevent that from happening.
It’s been clear for a while that Microsoft was getting impatient with the whole process. While rumors say that the two companies have been in talks on and off for the past year, the pressure has escalated recently as Hitwise, comScore and other firms that measure the popularity of websites have shown Yahoo and Microsoft’s search engine losing market share to Google. With Google increasing its lead, Microsoft must have felt pressure to do something, anything, to shake things up.
It’s been pointed out by better analysts than I that a merger between the Microsoft and Yahoo would still leave them a distant second in the search field to Google. According to a recent release from Hitwise, Google handled more than 67 percent of US searches in March 2008, while Microsoft and Yahoo put together didn’t even field 30 percent of of US searches for the same period.
So what heated up the bid, and what will both companies do now that the wedding has been called off? In this article I’ll review the events leading up to the meltdown, the reactions from both companies and a number of analysts, and what could happen moving forward.
You wouldn’t think that Microsoft needs to wait on anyone, and one can only assume that by April 5, the software giant got tired of waiting, and of eating everyone else’s dust in the search field. That’s when Ballmer sent a letter to Yahoo containing a thinly-veiled threat that the company would force a shareholder vote in an end run around Yahoo’s management if the two companies could not reach an agreement in three weeks. Meanwhile, both Microsoft and Yahoo tried negotiating for help from News Corp and AOL. Microsoft wanted help in its purchase bid, while Yahoo tried desperately to stay out of Microsoft’s clutches. Yahoo went to a number of other potential partners, in fact, looking for some kind of deal.
At this point, things begin to read a little like a political thriller. The two companies held secret meetings in mid-April where they discussed “social issues,” according to the New York Times, “like who would run the Yahoo unit if it were folded into Microsoft.” No agreements were reached at that time. Three days later, bankers for Yahoo hammered home the point that Microsoft’s $31 per share bid was too low by publicly suggesting that $40 a share would be appropriate.
Microsoft’s deadline passed with the company refusing to raise its bid. On the other hand, the proxy contest and other hostilities that Microsoft threatened failed to materialize. Yang apparently held Ballmer off in several phone conversations in which he suggested that Yahoo would consider less than $40 a share. So negotiations continued, then turned serious, with Ballmer flying out to Yahoo headquarters, bankers and lawyers blazing.
Apparently it all came down to numbers. Yang wanted $38 per share. Ballmer said he would pay no more than $33 per share. This was not pocket change; each dollar per share represents $1.4 billion in terms of the full bid. The two CEOs held a final meeting on Saturday at Microsoft headquarters. Yang backed down to $37 per share, but Ballmer refused to increase his company’s bid any further.
Just hours later, in fact, Ballmer sent Yang a letter that has been circulating online, outlining his company’s refusal to pursue the bid any further. In it, Ballmer describes the bids, pointing out that Microsoft’s final bid would have offered a 70 percent premium over the price at which Yahoo’s stock closed on January 31. Microsoft walked when Yahoo wanted another $5 billion over the company’s final bid. Ballmer also acknowledged that taking the bid directly to the shareholders “would necessarily involve a protracted proxy contest and…in the interim, you would take steps that would make Yahoo! Undesirable as a acquisition for Microsoft.”
Ballmer is referring to Yahoo’s recent experiment with Google to outsource “key paid Internet search terms” — or, in other words, letting Google handle some of Yahoo’s paid search advertising. Ballmer points out a number of disadvantages to that approach, including undermining Yahoo’s own long-term strategy vis a vis its Panama advertising platform. One can only assume the move on Yahoo’s part was desperate enough to make Microsoft withdraw its bid completely, because that’s exactly what happened.
In the face of Microsoft’s decision to drop its bid, Yahoo shares fell twenty percent within a few minutes after the market opened in New York. At $23.31 per share, it seems certain that Yang will have some pretty angry shareholders on his hands – and quite possibly demanding his head, or at least his job. The stock recovered some by market close on Monday, but $24.64 is still a lot less than even Microsoft’s original bid, let alone the final one. Is this how Yang maximizes value for his company’s shareholders?
A number of analysts have revised their ratings downward for Yahoo’s stock. ThinkPanmure analyst William Morrison expressed a particularly damning opinion: he lowered his rating from “Accumulate” to “Sell” and thought that Yahoo’s rejection of Microsoft’s bid may “go down as one of the more destructive decisions for shareholder value in the history of Internet stocks.”
So was walking away from the deal a good move for Microsoft and a bad move for Yahoo? It’s hard to say. Remember, despite all the figures being tossed around, this deal was never all about price. It was also about Microsoft trying to quickly gain some kind of competitive advantage in a field in which it has been floundering. But Ballmer thinks the company can afford to be patient if necessary. In an interview with the Wall Street Journal shortly before the walkout, he noted that “It could just take more time [to get that scale]…we’re just taking longer to build the scale [on our own].” On the other hand, it often seems as if Microsoft has never really “got” the Internet and the web; does Ballmer really have as much time as he thinks?
And price may not have been the biggest stumbling block. It’s been mentioned repeatedly that the two companies have wildly different cultures; a merger would have been challenging at best, especially when it’s widely known that Yang hates all things Microsoft and refuses to use their software. Also, the Times cited a source close to Yahoo as saying the search engine was also concerned about regulatory blocks to the deal, and wanted the higher offer to help hedge against that risk.
Both sides insist that Microsoft’s move is not yet another move in the merger dance, but a number of analysts are reluctant to rule that out. Jonathan Miller, the former chairman and CEO of AOL, thinks that this is “a very strong but serious negotiating tactic.” And in mid-January, Oracle won a similar game of chicken with BEA Systems. Oracle walked away from the deal in October when BEA rejected Oracle’s $17 per share bid and asked for $21 per share instead. Shareholder pressure pushed BEA back to the negotiating table, and Oracle agreed to a $19.38 per share price.
Could Microsoft be trying to do the same thing? Frankly, both sides face some serious pressure. Some observers think that Yang could be letting himself in for lawsuits for his role in the collapse of this deal. Shareholders have already filed seven lawsuits against the search engine since February 21, and the same company that is handling those suits is likely to be handling any more that crop up.
Meanwhile, Techcrunch and others are wondering if Steve Ballmer should leave Microsoft because the deal fell through – or if he’ll be pushed out because the deal fell through. Indeed, Techcrunch cited insiders at the software giant as saying the man has been “more of a tyrant than usual,” a sure sign that the stress has been getting to him. Maybe he’s lost sight of what’s important. On the other hand, if the deal is truly that important, how likely is it that Ballmer will let it go now?
Yahoo seems at least outwardly prepared to put the entire sordid affair behind it, however. The company is continuing to pursue search advertising deals with Google, and is talking with Time Warner about a merger with AOL. If that deal goes through, Time Warner will hold a 20 percent stake in the search engine.
But even there, Yahoo faces challenges. Kara Swisher interviewed about a dozen high-level Yahoo executives in the face of Microsoft’s rejection, and found that many of them are not thrilled about a tie-up with AOL – and even less thrilled about losing the Microsoft deal. A number of them seemed to think it was time for a new CEO.
The next week will likely be telling for both companies. My crystal ball isn’t working, but my guess is this won’t be the last we hear about major search-related mergers in connection with Yahoo and Microsoft. Time alone will tell.