Uncle John's Cabin

What a Bunch of Yahoos!

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I just read that Yahoo! is once again taunting Microsoft by extending the deadline to nominate board directors in hopes of a white knight to save them from a horribly "undervalued" takeover bid. Who might this white knight be? Time Warner/AOL? I certainly doubt it. Google? Umm, can we spell anti-trust? What I want to know is what Jerry Yang is smoking.

When Microsoft made it's $31 per share or 41.7 billion dollar buyout bid, Yahoo! was trading at about 17 and change. After the announced bid, the shares jumped to the expected $29 range. Yang and company quickly looked for other buyers and found none were to be had. After that, they turned down the offer stating that Microsoft's bid "severely underestimated the value of the company." By what standards are we measuring here? The stock's 52 week high is $34 in Oct when everything was over valued. Since Jerry's return, he has done very little to help this company, it's employees or it's shareholders.

Let's consider some scenarios on the surface here.

1) Yahoo accepts MS's bid for a 60%+ premium on it's shares. Everyone walks away happy except Jerry Yang who has now guaranteed that he will not be retained by MS to run it's internet division. In the mean time, the shares holders get some much needed relief in unlocking share holder value and a fighting chance against the behemoth named Google. Microsoft can finally recoup the $4 loss that the stock has suffered since the refusal of the takeover "bear hug" bid.

2) Microsoft walks away. Yahoo falls back to $17 (or lower considering how Google is doing at the moment) and is left to its own devices of learning new ways to lose market share and money. Microsoft gets its $4 pop back and has to keep building up its MSN/Windows Live internet brands and can hope to continue to chip away at Google's dominance by scavenging Yahoo's market share.

3) Yahoo! and MS stay in a protracted battle for company ownership. Yahoo! doesn't win as employees start to jump ship afraid for their jobs as they look for ways to cut costs. The biggest asset other than the company name is the talent at the company. Yahoo! will continue along like a wounded bird until it becomes so cheap and worth much less that virtually anyone could pick them up for a pocketful of change. MS, on the other hand, will do fine as a company, but it's stock will stay in the doldrums until a clear decision is made. They have the money to fight and survive without hurting their business. Yahoo! does not. Consider the recent record judgment against MS from the EU for 1.3 billion. That is 2 weeks operating cash flow for this company.

Don't think MS can't walk away from this deal and live with it. MS has a history of being tenacious to a fault! When Novell dominated the networking space, MS came in and destroyed them with Windows Server (and NT before that.) It took years, many dollars and more than a few iterations of Windows to do this but they did. When Access was a joke to rival dBase, MS kept pushing and improving until dBase became a trivia question on game shows. (How many people actually remembered this product until I mentioned it?) When Turbo Pascal and Turbo C were the top in their class as development tools, MS introduced a series of it's own competing tools starting with Quick C and evolving into Visual Studio, again, leaving Borland in the dust. Remember Lotus 1-2-3? WordPerfect? All victims to Microsoft's ability to beat people at their own games even against unbelievably daunting odds. They key is cash, smarts and the ability to improve year over year until they finally come up with a better product.

I personally know folks at MS and have on occasion considered working there (when I was younger and could stand the hours) and almost sold a product to them to be included into Windows. (IBM now owns it.) Their corporate culture is amazing. These people talk in terms of "bandwidth" when referring someone's ability to absorb new ideas. They regularly vote out the lowest performing 5% of their peers in the company to keep it strong and replace them with new grads at the tops of their class. For leadership, they buy best of breed when they can and retain the old leadership to run their new divisions. They also scavenge top talents from competitors on a regular basis.

OK, if Microsoft is so good, why is their stock waffling? A number of factors are involved here. The company is just too big and in too many areas to have anymore double digit growth overall as a company. Their desktop business, while still dominate is suffering from one of the biggest challenges yet; a move away from desktop software to internet subscription based software. Do they see this as a problem? Yes! One of many reasons Bill Gates walked away from the CEO job and then as chief architect is that he understands he is too attached to his original money makers, Basic and Windows. The new breed at MS understand the internet much better and you can see it in their latest offerings for Office subscriptions on the internet instead of their bread and butter, the Office Desktop Suite. Over the last 2 years, there has been a huge internal fight as the new "internet breed" has convinced the old guard that they need to change and has won. Basically, it takes time to move a monster this big but MS is more nimble than most companies its size. Is it possible, MS goes the way of the old IBM when they were dominate through the 80s? Sure. I have suspected at one time this will happen but like IBM, they could very well reinvent themselves. Every tech company of this size has those challenges.

In the end, I don't see Yahoo! accepting this offer as a defeat for them. It would be a victory for the stockholders, employee's and both companies. The only loser will be Jerry Yang (albeit a very rich loser.) If this battle continues, it will hurt Yahoo! as a company, it's employees and it's shareholders.

Jerry Yang reminds me of all the home owners trying to sell their houses at peak 2005-2006 prices and is unwilling to accept that prices have come down. Stop being a Yahoo Jerry and take the deal!

Uncle John