Yahoo Almost Gets It Right

by: Trade Radar Operator July 28, 2008 | about stocks: GOOG / MSFT / YHOO    
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Jerry Yang has taken a lot of heat for rebuffing Microsoft (MSFT) and and Carl Icahn. He has been repeatedly called on the carpet for not looking out for the interests of shareholders.

The attitude of many critics is that it is management's sole responsibility to deliver cash to shareholders and that any buyout offer for a reasonable amount of money is good enough.

Yang claimed that Microsoft was undervaluing Yahoo (YHOO) and held out for a higher price. Thus began the volleys back and forth between the two companies as talks broke down and started up again and alternative deals were proposed. Then Icahn jumped in, fresh from the debacle at Motorola, thinking that all he had to do was show up and Yahoo would capitulate to Ballmer.

Yang was right to fend off these two.

Ballmer proposing to buy just the search business of Yahoo! as a variation of the original deal illustrates how clueless he is. Google (GOOG) is the dominant player in search and delivers by far the best search experience. Google is also the best by far at monetizing search. Why tilt at that windmill? Neither Yahoo nor Microsoft come close to Google in search in terms of functionality or traffic. Why Microsoft values Yahoo! search is a mystery.

What Yahoo does have is content. Yahoo is truly a major destination on the Internet and Yang's ideas of making the site the starting point for the Internet's users is not as farfetched as Ballmer's idea of besting Google at search. With all the content at Yahoo! comes a significant amount of display advertising. Yet the content is not what Ballmer wanted!

Then we have Icahn. No plan other than to sell the company to a clueless Ballmer. Together, the two of them take cluelessness to a new level.

What would have happened to Yahoo! as part of Microsoft? Probably continued brain drain, atrophy of many aspects of the business, continued also-ran status of the search capability, reduced revenue from display advertising as content withers away, a setback for Yahoo!'s openness initiatives and who knows what else.

So is it management's duty to accept any offer that exceeds the current stock price? Or is it management's duty to do what is best for the company itself? I suspect that Yang couldn't stand thinking of how Ballmer would most likely squander the assets of Yahoo. Keeping Yahoo! independent at least gives the company an opportunity to get growth back on track on its own terms.

Nevertheless, Yang should indeed have taken Microsoft's offer to buy the search business. Get rid of search and let Microsoft distract themselves trying to beat Google. This would have allowed Yahoo to concentrate on monetizing its content. With page views up 20% over the previous year and solid partnerships with major advertisers, that seems the path of least resistance. Yahoo! can always outsource search to Google and point to Microsoft to show that competition still exists in the search space.

So with Icahn now on the board at Yahoo!, maybe he can learn a little about how an Internet business works and provide some kind of value. And given a little breathing room, maybe Yang can reinvigorate Yahoo! and the shareholders will ultimately benefit after all.

Disclosure: none

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This article has 10 comments:

  •  
    Jul 28 02:08 PM
    certainly, mgmt is not required to take any offer above stock price.. BUT, when the purchase price delivers, oh i dunno, let's say a 75% premium, i'd say the mgmt is required to give it some attention. and by attention, i mean an open assessment of the offer. Yahoo's mgmt began pushing back from the outset - i believe it was this demeanor that led to microsoft asking itself if it wanted to dump 45B+ into a company who didn't want to partner here... If Yahoo doesn't grow to a $33 stock in the next 24 months, Yang's legacy will be that of a selfish executive who let his ego guide the company rather than what was best for the ownership of Yahoo.
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  •  
    Jul 28 02:37 PM
    my guess is if the author had any holdings to disclose he'd feel diffently. it's easy to preach what a company should and should not do if you have no vested interest... and, now that i think about it, an an individual with zero holdings you really have no say in the matter of what should or should not have been done. if you want your say to matter - you best buy some YHOO stock.
    Reply | Link to Comment
  •  
    Jul 28 02:49 PM
    with yhoo down 4% today - lowest level since the proposed acquisition - it would seem they didn't get it right.
    Reply | Link to Comment
  •  
    Jul 28 03:11 PM
    Facts my friends are important. First of all I hold long MSFT, no interest in Yahoo or Google at all market-wise. Second, content is everything. When I do search and find a site with worthwhile information I put it in favorites. As I accumulate target sites I find that less and less time is spent searching (and enduring the ads). However, Yahoo content has become less and less reliable. I tried to access their site 47 times on one day last week and found the site to be down more than 25 times. The reason I kept track is because of the time I wasted the day before. I now have iGoogle up and running and won't have to even go to Yahoo for content that I can't egt to anyway. Can't wait to cash out of MSFT either.
    Larry
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  •  
    Jul 28 05:13 PM
    All goods comments, everyone. I guess I just have trouble accepting that a bad merger is better than no merger.
    Reply | Link to Comment
  •  
    Jul 28 05:24 PM
    I tend to believe that the only time the CEO should look out of the company is when it is in the best interest of the shareholders! To say that a 75% premium is not in the best interest of the shareholders is typically goofy talk (GOOG 2-3 years ago an exception). Trying to keep the company together is not always in the interests of shareholders, only corporate management and egos. I would have went along with Carl, hoping to get back to 30!
    Disclosure: long YHOO (only 50 shares so not a big investment).
    Reply | Link to Comment
  •  
    Jul 28 10:21 PM
    I agree with earlier comments regarding Yahoo! management possibly not thoroughly evaluating the offer. YHOO shareholders were provided a solid premium and I doubt the company will be able to do better in the coming year. Google has a solid grip on the business and is continuing to strengthen itself.
    Reply | Link to Comment
  •  
    Jul 29 10:27 AM
    I'm a yhoo share holder and when is a premium offer considered a premium ,when all stocks are down and based on the the price of its 52 week low?
    Reply | Link to Comment
  •  
    Jul 29 02:19 PM
    Yahoo is at the lowest its been since the proposed deal. If MSFT was the wrong choice, then what was the right one? For both companies, it sure seems they would have more going for them together than apart. Shareholders were unhappy then and there unhappy now. Sentiment for Yahoo is low (predictwallstreet.com/...). When I look at the month sentiment graph at predictwallstreet.com it shows that shareholders have been optimistic and bullish at times, but Yahoo continues to disappoint and sentiment falls with it. I predict Yahoo will close down tomorrow as well as we painfully watch its slow, slow growth.
    Reply | Link to Comment
  •  
    Jul 29 04:28 PM
    Looking at YHOO price, it's really discounted. I wanted to short YHOO back in Jan because of their clear downtrend, but then I saw their strong fundamental. Soon there is a MSFT offer. Good that I didn't short it. Even better I didn't chase after it. When it comes to investing, isn't it funny that big guy sucks too at least once a while? Boone Pickens gambles on small gain on the buyout and now whining about management. techland.blogs.fortune...

    Management does a fair calculation except that they don't have chips to bargain. With all the competition, no one is really willing to bet that YHOO will come back to the offer price any time soon (1-2 years). Looking interestingly valued now. Chasing after buyout and selling it now sounds like the opposite to me.
    Reply | Link to Comment
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