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May 3, 2008

Yahoo’s Tough Week Ahead

Michael Arrington

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At around 4:30 California time today news broke that Microsoft has formally withdrawn its offer to acquire Yahoo (see Ballmer’s email to Microsoft employees here).

Among other things, that ends a three month stock party where the market value of Yahoo jumped from about 26.2 billion to nearly $40 billion based on Microsoft’s offer to acquire Yahoo for $31/share on February 1.. That run up included a 7% gain in Yahoo’s stock price on Friday alone, based on market anticipation of a negotiated deal that would be announced on Monday.

That party began the day after Microsoft made an offer to acquire Yahoo for $31/share on February 1.

Here’s what to expect now that Microsoft has withdrawn their bid:

  • Google is still a wild card, and Yahoo may be sitting with them right now to try and iron out a search outsourcing deal. Of course, Yahoo has lost most of their negotiating leverage now that Microsoft is out of the picture.
  • Yahoo shares don’t trade until Monday; however, Yahoo Japan’s shares trade on the Tokyo Stock Market beginning at around 4:30 pm California time on Sunday. Yahoo Japan, which is 40% owned by Yahoo, saw a similar jump in share price around the Microsoft February 1 announcement. How it does tomorrow may be an indication of what will happen to Yahoo on Monday.
  • Yahoo shares will begin trading Monday morning at 7 am EST in off-hours trading. By the time the markets open at 9:30 EST, the fate of Yahoo’s stock will have largely been determined.
  • Look for a barrage of shareholder lawsuits against Yahoo next week.
  • If Yahoo gets down into the teens in stock price, look for private equity firms to start to take interest in the company.

Unless Yahoo pulls a very large rabbit out of a hat prior to trading on Monday, expect their share price to decline significantly. Yahoo has put in place a number of very expensive anti-takeover provisions and employee retention programs that the markets will factor in now that the Microsoft share price crutch has been removed. Also, their Q1 financial results, while above expectations, were not so materially positive as to offset the hit they are going to take.

In a nutshell, Yahoo’s scorched earth strategy worked. Now they have to live with their victory.

Google Wins

Google was the big winner in a Microsoft/Yahoo acquisition attempt, no matter what the outcome. But among the possible outcomes, a broken Yahoo and a frustrated Microsoft almost certainly result in increased market share for Google.

Don’t Count Microsoft Out Just Yet

There’s a reasonable chance that Yahoo tanks this week - really tanks. It’s not inconceivable that Microsoft could come right back to the table with a lower bid than the one they just pulled off the table. Don’t count Microsoft out yet - they may still get their win.

  • Sphere It

This entry was posted on Saturday, May 3rd, 2008 at 7:16 pm and is filed under Company & Product Profiles. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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Comments

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  1. Alex

    May 3rd, 2008 at 7:22 pm

    Good points. But, didn’t Panama finally start to show live this past quarter? If the street sees hope in Panama then the sell off make offer a nice bounce (imo).

  2. Suri

    May 3rd, 2008 at 7:24 pm

    MSFT has exposed Yahoo to the market place by choosing the ‘least expected’ path. It will be hard for yahoo in the next 2 weeks but they can possibly rebound if they keep their identity intact.

    Hey!
    Microsoft had valued Yahoo for more than $40B (for nothing?) and one letter from Steve should not change things.. reality may be different..

    There is a great possibility of MSFT coming back at Yahoo in 6 months…and buy it at a lesser value.

  3. kip

    May 3rd, 2008 at 7:29 pm

    @Alex - huh? Like Ballmer says, a Yahoo agreement with Google sounds a death knell for Panama, and its not worth anything without eyeballs, there’s simply no one to buy it. Yahoo is backed into a corner.

  4. Leah McChesney

    May 3rd, 2008 at 7:35 pm

    Yahoo? …WHO? :)

  5. weberence

    May 3rd, 2008 at 7:35 pm

    It is time for a google OS :)

  6. javier rodriguez

    May 3rd, 2008 at 7:36 pm

    These is just part of the Microsoft plan:

    (1) Retire the bid

    (2) Yahoo share price declines to the floor

    (3) Microsoft came to save the day (at a lower price of course)

    Yahoo should accept the offer in first place… fight is futile :o)

  7. Aaron Strout

    May 3rd, 2008 at 7:37 pm

    Mike - great summary. I couldn’t agree more. You’ve gotta feel a little bad about the Yahoo! employees who are the big losers in this deal, even if Y! does do a search deal with Google. $37/share was a pretty sweet deal - one I don’t see them to exceed any time soon.

    I’ll be keeping my eye on Twitter tomorrow at 4:30 PM PT as you suggest to see what happens on the Tokyo stock exchange.

    Best,
    Aaron (@astrout)

  8. Norby

    May 3rd, 2008 at 7:37 pm

    I think you mean “formally”, not formerly … though hey, what do I know?

    -/\/

  9. ameo

    May 3rd, 2008 at 7:38 pm

    i’m totally with Suri i think that this is smart move from Microsoft and they’ll for try to finish what they have begun in 1st Feb

  10. Dave Levine

    May 3rd, 2008 at 7:39 pm

    This is where finance theory falls apart. In academia they would tell that YHOO shares should pop because insiders with theoretically better information (YHOO mgmt) thought $34 was too low a price, implying that they believe the firm is worth more than that. However, I would be shocked if this doesn’t rock YHOO and pop MSFT as people react positively to MSFT’s discipline in avoiding an all out bidding war.

    One has to believe this game isn’t over, because in a lot of ways the deal made sense - especially for MSFT. GOOG clearly is a winner in the short term as a well funded competitor in YHOO would have posed a greater threat than either Co does independently. Will be interesting to watch the game continue to unfold.

  11. Cesar Cardoso

    May 3rd, 2008 at 7:40 pm

    OK, people, there’s a problem with the ‘Microsoft can come back’ scenario: Jerry Yang will, at least, try to guarantee that a Microsoft future buy will be a wasted money on an essentially corporate harakiri victim. And even if shareholder’s revolt lead to Yang’s fall, he has done enough to make Yahoo a tough for Microsoft.

    Yang has been clear: he prefers to kill the company he found that sell it to Microsoft, and he WILL do it.

  12. Mike Abundo

    May 3rd, 2008 at 7:43 pm

    This is the problem when Wall Street sets a technology company’s agenda: independence and innovation are frowned upon in favor of instant gratification.

  13. AboutLisa

    May 3rd, 2008 at 7:44 pm

    Yahoo’s stock was already substantially down from MSFT offer price by Friday. Someone knew it. Arbitrage traders will have to sell. The reason to be in the stock is gone. Can’t wait to hear the market wizards put their spell on the whole thing. Expect record volume. Bring it on!

  14. David Damore

    May 3rd, 2008 at 7:46 pm

    Yahoo will go to Microsoft and beg [& cry] for the money.
    There best option is to accept a deal; especially since they pushed Microsoft as hard as they did for a higher price.

  15. Lee

    May 3rd, 2008 at 7:46 pm

    Cesar:
    Bingo. He’ll take the ship down before letting MS have it. This is what happens when people stop thinking about shareholders and money and only think for themselves. You can get away with it when you are a private company, but once you go public that freedom is over.

    Mike:
    Good summary so far. I’ll be looking forward to see how this develops this week, and I’ll definitely come here first.

  16. Jonathan Joseph

    May 3rd, 2008 at 7:49 pm

    I’m curious as to how this affects the broader ecosystem. Does this mean MSFT would go on a Web 2.0 acquisition bender? That could make things very interesting in the Valley.

  17. Ruthless Gravity

    May 3rd, 2008 at 7:49 pm

    the insiders have to act rationally on that insider information in order for that to hold. It seems like they looked at MSFT’s B/S and decided to do a little extortion.

  18. Parag Mathur

    May 3rd, 2008 at 7:57 pm

    Hey Mike,

    Based on your legal knowledge, how strong a case do you think the shareholder lawsuits would have against the Yahoo board? Almost certainly, YHOO will drop big time come Monday.

  19. cocoy

    May 3rd, 2008 at 7:58 pm

    I think this is a good move by MSFT. These big acquisitions look great as headlines but hardly are successful buys. And it works for the deal makers but hardly for the buying company. AOL-Time Warner is one example.

    MSFT buying YHOO for more than the offered price and for what, revenue that is questionable in the short term because by the time these guys get integrated, google’s many steps ahead.

    MSFT is better off investing that money somewhere else that can deliver better return on their investment. Like growing small companies that make better sense to their vision of MSFT. Like cleaning up the farce Windows is turning out to be. I think MSFT can do that. They’ve got smart people there.

    YHOO? is it a search engine or is it a New Media company? They’re good at forming/maintaining communities: see yahoo mail, messenger, flickr, and is good at aggregating news: see yahoo’s front page. I think they’re a New Media Company and the sooner they focus on that and less on “search” the better. That said, Mahalo is actually a better fit with YHOO’s goal, imho. They’re of the same “genre”.

    I agree: advantage Google. They’re the real winner here, even if MSFT+YHOO marriage went through.

  20. jamie

    May 3rd, 2008 at 8:00 pm

    why is anyone talking about panama? this was rolled out and accruing its since faded hope of ‘yahoo recovery’ back in fall of ‘06..I dont think it saved the company. its a non - issue. they should have worked out a deal. now its chaos time. I, and everyone else, has their shares ready to sell monday bright and early.

  21. Adam

    May 3rd, 2008 at 8:06 pm

    Great article. However, we can’t look forward to the Tokyo Stock Exchange for a preview as it will be closed Monday and Tuesday due to Japan’s Golden Week holiday.

    Yahoo! Japan will more than likely be following the trails of the NYSE.

  22. Eric Dewhirst

    May 3rd, 2008 at 8:11 pm

    Three words will be heard - “Sell, Sell, Sell”

    Some pretty bad cards have been played on Yahoo’s part - if Google comes in then there is antitrust, nobody else wanted to buy them so I cannot see how their valuation is not going to go down. Microsoft won’t even have to go hostile takeover route - there will be enough shareholder lawsuits to tie up Yahoo and MSFT can walk up the middle while Yahoo tries to weather the storm.

    If I had a million bucks in Yahoo stock right now I can’t see how I would say - nahhh it will bounce back I will weather this one. Nope it is unload and unload as fast as you can. My prediction is that three months from now it will be trading at 17 bucks a share.

    I don’t wish bad time on Yahoo especially the employees - however someone should have put old Kenny Rogers on the PA - “the Gambler” - when it was decision making time.

    Cheers - Eric

  23. Sandra G

    May 3rd, 2008 at 8:15 pm

    What are the odds of all the possible lawsuits against Yahoo becoming 1 large class action suit? Even then, the large shareholders wanted more money, a minimum of $37 and they weren’t getting it. Yang listened to them apparently.

    Michael, what could come out in a shareholder lawsuit from Yahoo’s side, would any financial information, future strategy etc. become public that we didn’t know previously?

  24. nitsuj

    May 3rd, 2008 at 8:32 pm

    “If I had a million bucks in Yahoo stock right now I can’t see how I would say - nahhh it will bounce back I will weather this one. Nope it is unload and unload as fast as you can. My prediction is that three months from now it will be trading at 17 bucks a share.”

    I’d say that’s not a very bold prediction given it was ~$18 before the acquisition talk started.

  25. Eric Dewhirst

    May 3rd, 2008 at 8:41 pm

    @24 nitsuj - that is true - what do you predict it will be?

    Cheers - Eric

  26. Patrick Grote

    May 3rd, 2008 at 8:47 pm

    nitsuj … if Microsoft doesn’t come back and offer another deal when the Yahoo crashes, then I would think they’ll drop to $10 a share.

    They’ve shown no ability to take advantage of all the eyeballs they have across their properties.

    As Lee mentioned above, Yang made this personal, which was a huge mistake.

  27. dling

    May 3rd, 2008 at 8:48 pm

    Game theory says:
    yahoo, google and (aol or myspace)

    Ménage à Troi

  28. Jimmy Dell

    May 3rd, 2008 at 9:03 pm

    I think Google drags it’s heels on the partnership now too. It’s in Google’s best interests to kick Yahoo while it’s down. Google will want to make sure that Yahoo is thoroughly damaged goods so that even if Microsoft comes back and does a deal later, that it’s buying an empty shell. Google will never ever buy Yahoo but it will never do anything that might result in a strengthened Yahoo ending up in Microsoft’s hands.

  29. johns

    May 3rd, 2008 at 9:23 pm

    Yahoo might well drop to $15 on Monday. Shorts should be clapping.

    If Microsoft really wants Yahoo, they should begin to slowly and anonymously accumulate shares at the lower prices ahead. Eventually they will get enough to take control of the company and at a much lower price than they would have paid. Then they should boot Yang out the door (if the Yahoo shareholders haven’t already done so). Greed is the downfall of many. Just watch Deal or No Deal on TV :)

  30. MrCashyCash

    May 3rd, 2008 at 9:26 pm

    If the stock goes below the $19 it was trading at…

    … Private Equity comes in …

    … They’ll make MSFT look like Cinderella.

    Anything non-essential gets sold off.

  31. angrys0ul.com

    May 3rd, 2008 at 9:48 pm

    its all part of the plan

  32. MSFT

    May 3rd, 2008 at 10:13 pm

    MSFT is back in control…full control of this.

  33. Sandeep

    May 3rd, 2008 at 10:41 pm

    @10 Dave

    Yahoo stock will drop and might be in twenties. I will be surprised if it goes into teens.

    Reasons:

    1. Yahoo’s shareholders and management believe that their stock is worth $37. what more insider information can anyone want?

    For more information on why this deal was not good, check out my blog:

    http://webinsider.blogspot.com.....o-why.html

  34. s rem

    May 3rd, 2008 at 10:41 pm

    This seems similar to what happened between ORCL and BEA. If history repeats, MSFT will buy them for 37 in a couple of months.

    While YHOO might no longer be worth 40b, I think its still worth more than that to MSFT, and that’s what matters in the long run.

  35. r

    May 3rd, 2008 at 10:55 pm

    Plenty of Delaware judges have admonished shareholders in the past, that if you aren’t happy with the performance of a board oust the board of directors and nominate your own candidates. Just consider the Disney case that finished in 2005.

    A judge might be likely to toss a shareholder suit for that reason if the litigious shareholders have not at least nominated candidates and the current board survives in tact. This is particularly true because the full board comes up for election in a matter of weeks.

    Marc Andreessen made a good post yesterday about the concerns of both companies to the deal. A good read. http://blog.pmarca.com/2008/05.....micro.html

    Only in hindsight can any of us really say whether the board did the right thing or was smoking something. I personally feel they did the right thing and the company is worth more, at least to Microsoft.

  36. Sean

    May 3rd, 2008 at 11:33 pm

    I’m amazed at the discipline on MS’ part - no one thought they would walk away. Wow.

    Like others have said though, they’re probably not done. Still, surprising!

  37. C.S.

    May 3rd, 2008 at 11:48 pm

    Good for Microsoft. Even better for Google.

    Yahoo’s incompetence is what has got them where they are.

    They better have a BIG rabbit in that hat.

    My prediction: MS rebids $10/shr within two months.

  38. johns

    May 3rd, 2008 at 11:50 pm

    @33 (Sandeep) - 1. Yahoo’s shareholders and management believe that their stock is worth $37. what more insider information can anyone want?

    Sort of like all the home owners these days who believe their houses are worth hundreds of thousands more than anyone is willing to pay?

  39. anon

    May 4th, 2008 at 12:05 am

    I’m sorry but market pricing has no clue what they’re doing in the short term, so using that as a barometer for the intrinsic value of a company is stupid.

    We only need to take a look at Google’s stock price history. It was above $700 in December, dropped to $420 just last month, and it’s now back at $580. So in the course of 5 months, we’ve had a 40% drop in price, followed by increase of 40%.

    Apple’s stock has had a similar run reaching $200, dropping to $120, and now it’s back at $180.

    Has anything big changed at these 2 companies? No. They have been doing business as usual and nothing justified the gigantic swings in price.

  40. Sandeep

    May 4th, 2008 at 12:34 am

    @38 Johns

    Fair point, but home owner analogy might not fit here.

    Unlike homeowners, shareholders do not have emotional attachment with the company. They are interested in better ROI (In fact their attachment is with the “investment”, so they would happily invest in any company: in this case, for shareholders it does not matter who owns the company, as long as they get good ROI). I can understand that Yahoo management might have been emotionally connected with the company, but this decision is made by the BoD, not the management.

  41. jhcmal

    May 4th, 2008 at 2:04 am

    Well, the result is against most people’s expectation. But rethink about the different corporate cultural backgrounds the two companies have, it is not hard to realize this possible outcome. Sounds a hindsight? Yes, it is.

    Ballmer ’s hardball playing at the beginning and “microsofteded ” its position to sweeten the deal to $33 later and finally gave all up, all proved that Mallmer was not a good deal maker and might have taken a myopic view.

    Was it due to his personality or due to culture issue? Maybe both. MSFT shareholders may take a deep release for the short while YHOO’s may take a hit. But Keep in mind, the market is to reflect a company’s long term value instead of the short eventually.

    While Ballmer said MSFT can go forward without YHOO, I hope he is right or he may have made a big strategic mistake by walking away as time waits for no one..

  42. Slow Buy

    May 4th, 2008 at 7:02 am

    Not sure about the American laws surrounding this, but can’t Microsoft buy the undervalued shares off the market until a certain position is reached, before which they do not need to declare an intent (something like 10%) ? If they don’t have that minimum yet, buying from a tanked stock on Monday might give them additional leverage in future plays: they’ll have saved a lot of money on the purchase, and can apply the savings to a future offer at an already reduced price.

  43. Arjen

    May 4th, 2008 at 7:07 am

    Michael, do you feel stupid now that your predictions over the last few weeks didn’t come true?

  44. fred wilson

    May 4th, 2008 at 7:57 am

    mike

    please post this poll on TC and let’s see where people think YHOO will drop to

    http://avc.blogs.com/a_vc/2008.....-yhoo.html

    if you click the share tab, you’ll get the embed code

    Fred

  45. nitsuj

    May 4th, 2008 at 10:05 am

    @Sandeep - if they were so convinced it was worth $37 a share wouldn’t they have been all buying shares for their personal accounts when the stock was at $18 (and they may have, I doubt it, but I’m too lazy this AM to bother searching for that info). Also, I think you’d have to be kidding yourself to say that this whole deal wasn’t an emotional thing for Yang and the BoD.

  46. Yahoo supporter

    May 4th, 2008 at 11:55 am

    Yang placed his own emotions before the shareholder value. I pity Yahoo Shareholders and employees. I understand where Yang is coming from, but he is again action as a founder, and not as a CEO. Thats why he will remin the founder of Y! but kicked out from CEO position!

  47. Yo

    May 4th, 2008 at 5:42 pm

    Yahoo Japan is closed today. It’s a national holiday, Kodomo-no-hi.

    http://quote.yahoo.co.jp/q?s=4.....m65,m130,s

  48. Yahooooo!

    May 4th, 2008 at 6:10 pm

    Heheh… I like that graphic with the post!

    Perfect…

    I’d LOVE to be a fly on the wall when the Yahoo Board meets next (and starts dealing with all those shareholder lawsuits that will be filed beginning in the next week or two).

  49. BJ Upton

    May 4th, 2008 at 8:44 pm

    You keep using that “scorched earth” metaphor. It doesn’t mean what you think it means.

    I’m sure you don’t know how to use “begs the question” either.

  50. Jody

    May 4th, 2008 at 9:32 pm

    Great summary and insight everyone. I have to agree with Cesar:

    This is the problem when Wall Street sets a technology company’s agenda: independence and innovation are frowned upon in favor of instant gratification.

    Question here, why doesn’t MSFT put their resources into Search and their online ad platform? Are they not confident with their engineers. Where’s the innovation here? Trying to acquire the competition is not innovative, it stinks of desperation and arrogance. Even if the deal were to go through, MSFT would still be #2 in Search.

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