As everyone digests yesterday’s extraordinary news around Microsoft’s withdrawal of their Yahoo bid, the big rumor around the valley is that Yahoo is frantically trying to negotiate a deal with Google to outsource search advertising and get it announced before the markets open tomorrow.
Yahoo-Google?
It’s not clear that Google still wants to do such a deal now that the immediate threat of a Microsoft/Yahoo deal is gone. The reason – the almost certain regulatory review (even Congress has taken note). And even if they are still willing to talk, Yahoo has lost the lions share of negotiating leverage. That means a lower revenue share, a shorter term deal, etc.
If Yahoo and Google reach a deal, it’s possible they could at least argue for a case that Yahoo’s value should increase to $37/share (but the markets won’t buy it): based on analyst projections, Yahoo could increase cash flow by $1 billion or more by outsourcing, and increase revenue per thousand search queries to as high as $90 from the current $40 or so. Combine that with massive headcount reductions (Yahoo won’t need their search marketing employees any more, possibly 2,000 employees), and Yahoo could have short term bottom line gains of well $1.2 billion or more/year.
With a trailing P/E of almost 40, That extra cash could, theoretically, boost their market cap by more than enough to reach their goal of $37/share.
That’s the theory anyway.
In reality, even if a deal is announced, the markets will factor in the risk of regulatory veto, as well as the long term negative effects of giving away the search marketing business to their biggest competitor.
And Yahoo’s true market value today remains in the $19/share range, or about $26 billion, now that the Microsoft crutch has ben removed. A good chunk of that – $10 billion or so – is actually from their Alibaba and Yahoo Japan holdings.
So Yahoo and Google may do a deal or they may not – but either way it isn’t going to help Yahoo’s share price as much as they hope.
Angry Shareholders
We also expect Yahoo to announce their delayed annual shareholder meeting early this week, and actually hold it as early as late June. When it’s announced, shareholders have ten days to propose an alternate slate of board members. Microsoft says they are sitting on the sidelines, but a group of angry stockholders may now emboldened enough to make their own effort to change company management.
To say that shareholders are angry is an understatement. They made it clear to anyone who’d talk to them that they would be more than happy with Microsoft’s $33/share final offer. Legg Mason, Capital Research, T. Rowe Price and others all reportedly strongly wanted the Microsoft deal to happen.
The coming days/weeks will certainly be interesting!
The stock will be anything but in the black Monday.
Interesting points. I wonder if those big shareholders you mentioned will actually nominate a couple directors off of Microsoft’s hostile slate that you have been compiling over the past couple weeks. I wouldn’t be surprised if that happened.
I am betting on MS making a second offer with a lower bid sometime after the shareholder’s meeting and the new board is nominated. This will also give time for Q2 earnings to cook and boil Jerry in the next cc. Oracle pulled off the strategy when trying to go after BEA Systems a few years ago and I don’t see why MS can’t make it work again.
I call 16$
Starting to look a lot like Netscape
Nice article Michael. I wasn’t expecting this path but now I see what you mean. Anyway I think that the deal with Google is still possible because Google knows that Microsoft can make another unsolicited bid anytime.
so how does that work? I just put in my yhoo sell order at market value? am I in line with like a million other people at opening bell tomorrow / 7am after hours? who’s actually going to buy this stuff? does anyone want my shares? I have shares for sale…name your price…
Yahoo is sadly dying. I see the end of Silicon Valley. Tel Aviv anyone?
the google deal can’t happen as it could damage google with legal problems.
Coming soon to a PC near you: Yahoogle.
Then,the)’ll merge with AOL and become Yahoogle Online, YOL.
In 2012 they’ll meld with Microsoft and morph into Microogle Online.
And in 2019, the whole outfit will fuse with CBS, Fox and Disney to become Ultronix Media + Software, or Ultrasoft – the world’s biggest megacorporation, which will control all our minds through nanoplants.
Yahoo has such a fantastic range of web products and services, but its management team hasn’t a clue as to how to maximise higher revenue streams across the board.
An Ad deal with Google may return higher profits, but what business strategies does the management team have in place for Yahoo’s other core products and services.
If Microsoft is so focused on still buying major web companies that have a huge user base for future web advertising opportunities, then perhaps Mr Ballmer should also look for web companies that also bring in other revenue streams, like Amazon or eBay.
In buying eBay, Microsoft does not only have access to the world’s largest online aution community, but it would also control the popular Paypal and Skype services, that both have huge customer bases.
Plus in purchasing Amazon, Microsoft would own the biggest online shopping site on the site, that has also a number of very innovative Web 2.0 services.
Of course in the not too distant future, Microsoft may wish to try and launch another bid for Yahoo, due to its huge potential in gaining key web advertising revenues.
But both eBay and Amazon, have the potential to offer Microsoft a lot more revenue streams then just web advertising, plus they are both a lot more cheaper to purchase.
Perhaps if Yahoo’s shares take a serious downturn during the course of the year, Microsoft could purchase both Yahoo and eBay and create a huge online powerhouse that can cover all areas of online revenue streams.
Who’s shorting?
A deal with Google will not happen b/c of regulatory issues. MS withdrawl of the deal was to allow the hedge funds to step up and crush yahoo and leave MS hands clean.
If Yahoo is approaching Google and willing to be a partner, that should be factored by the regulators
It makes no difference about the Microsoft deal – either a partnership means a high profit for Google – or it doesn’t. This is independent of the Microsoft deal.
The fact that domestic PPCs are down on Google (according to comscore) should have more bearing on Google’s decision than the Microsoft discussions.
If Yahoo was so concerned about their lack of potential negotiating power, surely they would have waited a little longer to cut off negotiations with Microsoft until the negotiations with Google was settled.
Mike,
what about a story about the other losers in this soap opera, the bankers who just kissed fat payouts goodbye?
Black Monday? I say Black Week!
As far as any Google/Yahoo deal goes, I am not sure if Google would be wise to consider this deal, as they would not only have to deal with Congress, but the EU as well (and possibly China).
@ Praveen: $15-$16 is probably the lowest it will go (this is just a “guestimate,” so take it with a huge grain of salt) although I would think Yahoo! might hover around $20.
@ Michael Arrington: Perhaps its time to whip out the “guess how low Yahoo will go” w/a free iPod Touch for the winner. Just a random suggestion.
To say that YHOO is only worth $19/share just doesn’t sound right. Assuming your valuation of their stakes in Alibaba and Yahoo Japan are right at $10B, are you saying that all the rest of YHOO is worth $16B?
Microsoft surely wanted to get a deal done, but to suggest they were overvaluing the business by almost 100% just does not seem reasonable (i.e. $34/share = ~$46B – $10B = $36B for Yahoo ex Alibaba and JPY).
YHOO shareholders will be disappointed, and should be, especially if you are anywhere in the ballpark on their standalone valuation. I just don’t think Yang or anyone is quite as irrational as the chatter is making him out to be.
It seems like Microsoft benefitted hugely. For them, there was upside in both the acquisition itself, and the prospect of a hostile takeover to weaken Yahoo!. Think about it… Yahoo! aggressively mobilized against MS rather than focusing 100% on their future growth engines. This is the type of strategy that Microsoft is great out. They position themselves to benefit “win” or “lose”. http://tinyurl.com/5ezc2t
Wow if Yahoo only has the google deal as backup they are screwed. Why would someone want to invest in a company whose long-term strategy appears to be a slow humiliating death at the hands of the company they once could have purchased? To me it makes them look like they are worth even less than $19 if they don’t value their own search advertising which was part of MS wanted out of the deal. They are going to get picked clean especially since the same big houses that wanted the deal to go down will be figuring how to benefit and speed up the gruesome death that awaits.
Is anyone else going to buy a chunk of shares in Yahoo if it drops to $15? Nice little profit when Microsoft comes back in at $30?
Anyone?
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May 4th, 2008 at 11:50 am
Ballmer is doing great and he is still the guy for the job (remember that Gates is still pulling the strings, and Ballmer is Gates’s best friend.)
Yahoo’s stock was up more than 10% (including after hours activity) last Friday night, on speculation that a deal would happen.
What if there’s no more deal ahead? Yahoo’s stock will drop,
Gordon (Crawford) will call his buddy Terry (Semel), who will call his friend Jerry (Yang), who will realize that nobody’s happy (read really pissed) with the withdraw from Microsoft.
I think Microsoft are testing what a withdraw would do to Yahoo’s stock.
The week end is the perfect time to do it.
If they are really walking away, then Yahoo is lucky and I’m happy about it.
But if history repeats itself, there’s more to come from the Redmont Behemoth… and now, they have the big guys on their side.
Huge spread of puts from 27.50 down to 20 with spikes at 27.50 and 25. But that was of course as of Friday. Some recent investors will hold out for another MSFT bid, but my estimate is that YHOO closes Monday around 21 then declines over the next 2Q to the mid teens as future MSFT negotiations collapse.
Arrington has been commended to spread all the FUD about Yahoo’s stock.
“A lie repeated one thousand times becomes true”
So, how is propaganda 101 going?
If Yahoo tanks below $20, I’ll buy a million shares for I know it will recover over $30s in less than a week and I’ll laugh my ass to the bank.
Thanks M$ for making me rich!
would Microsoft still be interested months from now to buy a weaker Yahoo? I think what Microsoft was interested was not the technology but its market position, and if that becomes weaker, it might not be that cool to get it anymore.
Microsoft is so poor?… I think, that Microsoft will soon have a new offer to make yahoo.
First, you don’t have 20 million dollars. You probably don’t have 2 dollars. Second, YHOO wasn’t trading at over 20 before MS came in. YHOO will drop into the high teens unless they come out with an announcement on Monday with GOOG. The question is, what will happen to MS shares? MS had enough money to buy YHOO and then some, and they’ve never had any long term debt. Will people see this as MS saving a ton of cash on crappy target, or will they see this as a blow to the juggernaut of Microsoft/Oracle Acquiror power and send the stock down a buck or two?
Maybe this is the chance for IBM to make itself relevant again.
Any shareholder who is “angry” about this is a fool. If they wanted to invest in Microsoft, they should’ve bought Microsoft stock. The fact that Yahoo! has enough cahones to not allow themselves to be steamrolled into oblivion by the Web Witless Wonder is a sign of strength.
i’m glad microsoft backed out. i hope to see yahoo survive.
This is one hot mess and I blame Yahoo!
@will…I wouldn’t be holding my breath (or money) for Yahoo to get back up to $30 anytime soon, short of a PE white knight. They’re going to see how nice it is to be on their own, but having said that, I can’t blame them for running from MS either.
I’m predicting Yahoo at $15, and Yang & Co. forced out by shareholders within a few months.
At the very least, Yahoo will be in court for the next 2 years, and will be paying out a LOT in legal costs, and restitution to mis-served shareholders….
Been nice knowing ya, Yahoo…
Ballmer called your bluff.
I’m glad I dumped my Yahoo! shares about a year ago. What were the board of directors thinking????!!!
Probably it won’t only be the Monday. I think it’s still on going for longer.
I’m predicting Yahoo at $15, and Yang & Co. forced out by shareholders within a few months.
At the very least, Yahoo will be in court for the next 2 years, and will be paying out a LOT in legal costs, and restitution to mis-served shareholders….
Been nice knowing ya, Yahoo…
Ballmer called your bluff.
Why Y! insisted wanting $4 a share more?
yahoo shareholders are as dim as their users. they’ll take the stock to the mid-20s hoping for jerry to pull a rabbit that might levitate the stock again.
over time the stock will drift under $20 and bounce around. don’t look for too much drama tomorrow, yahoo shareholders are as indecisive as their users.
jerry won’t go. it must be obvious at this point that the reason he pushed back on all of this is because he legitimately believes he is a steve jobs-type character who can do for apple what the real steve did after gil amelio nearly destroyed the company. this is pure arrogance and ego at work. he’ll just trot out the same old yahoo storyline – “give me three more quarters!”, and shareholders will keep trading in vain. shareholders will never muster the balls to oust him.
The problem with Y! is that if they turned off the lights – pulled the plug on their services would anyone care?
Microsoft gains nothing with yahoo, what msft needs to look at is aapl > video and multimedia is the key not search.