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Sunday, May 04, 2008

MicroHoo Deal Collapses: What a Mess

The following is just my take today. Others in my company, and me last week or a week from now, might feel differently.

In the wake of Microsoft withdrawing its offer, we're still left with no resolution on the matter. And that is what is most troubling about the charade we've just witnessed. Microsoft has not stated any intention to pursue a proxy fight. Logically, that probably means they're just playing it out in an attempt to get a better price, by hoping Yahoo will founder and need a rescue operation.

I'm not sure if I'm more annoyed by Yahoo not taking the significantly sweetened offer, or by Microsoft's high-profile approach to the prospect of combining the two businesses. This time around, it was a formal offer intended to generate all of the shareholder and media response that it did. The fact that it led to nothing suggests that it was a low-probability deal in the first place. Yahoo increased its counteroffer price so much because management didn't want to work with Ballmer and his colleagues; didn't want to be swallowed up by that enemy, in particular. The previous attempt to discuss the idea behind the scenes was probably the better way to go, but Microsoft knew that if it chose the polite route, the answer would always be no.

This morning, seeing the news, I went in search of analysis beyond the cursory regurgitations that we see on so many blogs. I figured, hey, I'm not going to stick my neck out and say "what a mess" on such a nice weekend morning, unless someone else does.

Thankfully Danny Sullivan is on fire today.

With respect, Danny reminds Microsoft that is has "no brand in search. It literally has no brand."

That, of course, is why it bid on a company that has a pretty good brand.

We're in the same place as we were a month ago, roughly. Microsoft still needs Yahoo; Yahoo doesn't really need Microsoft. Yahoo shareholders will nonetheless probably say yes to a deal if the price is high enough.

Here is where we get into a potentially long, dragged-out process. Microsoft lurking as a familiar, sinister force, hoping its acquisition target weakens further to increase the chances of shareholders agreeing to a buyout for the original offer price, or a dollar more.

If anything, though, this process has made Yahoo less likely to weaken. It will increase the company's resolve to innovate and to build its brand. Rebounding from a period of weakened morale, employees in various operating units will work harder, work smarter, work together towards tangible financial and audience-building results. Those who do not will be easier to identify, and top management will not even need an unusual degree of perspicacity or ruthlessness to cut loose the underperformers.

That all sounds good. In a normal world, that would be good. The #2 player finds its feet and moves forward. Unfortunately all that does is cause another impasse if the acquiring company returns with a hostile offer. The two sides will continue to be at least as far apart in their assessment of the value of Yahoo. Knowing how this scenario played out in the Oracle-Peoplesoft case, Ballmer already knows this. And knows that shareholders will eventually relent.

The scenario from there would be less than perfect, because a delayed hostile takeover takes on messy proportions once consummated. And the delay would probably be very long, and very costly on several measures. We have no reason to doubt that the Yahoo board will consider every form of legal poison pill clause to deter Microsoft and its own shareholders from doing a deal.

Yahoo's age and high level of institutional ownership certainly makes it more vulnerable than it otherwise would be. As autocratic as a dual-class share structure makes a company, they wouldn't be in the mess they are today if they had one.

Take comfort in this much, Yahoos. At least the Zapata Fish Oil Corporation hasn't bid on you.

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