Maybe Microsoft (Nasdaq: MSFT) came on a bit too strong when it presented a juicy buyout bid for Yahoo! (Nasdaq: YHOO) two months ago.
If the software giant could do it all over again, I'm sure it would have come in lower. A lot lower. Had it waited a few more months for further deterioration in the market's perceived value of search engines, it could have picked up Yahoo! at a pittance.
Microsoft's doing the best it can now to salvage its highball offer. For now, that means sending out signs that it's holding pat to its original offer -- now worth $29.53 in cash and stock for each share of Yahoo! -- instead of upping the ante in an empty auction parlor.
"There's no reason to bid against ourselves," an unnamed person close to Microsoft told The Wall Street Journal this week, mirroring what several journalists and analysts -- like me -- have said already.
In contrast, Yahoo! still believes that it's worth more than Microsoft's offer. Others seem to agree. Citi analyst Mark Mahaney raised his target price on Yahoo! from $31 to $34 last week -- even though that original $31 offer is now unattainable.
If only Redmond had a time machine
How different things would be today if Microsoft had come in at, say, $26 a share! Amid such tempered expectations, no other bidder would have dreamed of stepping up to buy a fading Yahoo! at 57 times this year's earnings. If Yahoo! still held out, Microsoft could have sweetened the offer into the $28 range.
Everyone would have won. Yahoo! would have fetched a ransom more than double what faster-growing peers like Google (Nasdaq: GOOG) and Ask.com parent IAC (Nasdaq: IACI) command, with the satisfaction of squeezing a little more out of its acquirer. Microsoft could have added Yahoo! without burning through its greenbacks.
What did we get instead? Discord.
Microsoft blew it by saying "I love you" on the first date, too closely following News Corp.'s (NYSE: NWS) premium bid for Dow Jones. By initially bidding so high, it created the false impression that this was the floor -- not the ceiling -- of what it was willing to pay.
Yahoo! began to believe that its worth exceeded not only the teens that Mr. Market was willing to pay before the offer, but also the $31 Mr. Softy suggested.
Breaking down the breakdown
Several events since Yahoo!'s fourth-quarter report seem to justify a lower offer from Microsoft:
- Yahoo! has reduced profit estimates over the next two years.
- True to a company in retreat, Yahoo! announced layoffs.
- Yahoo!'s Asian investments have lost value.
- Yahoo! probably can't transfer its minority stake in Alibaba to Microsoft.
- Valuations in the search engine sector have fallen.
- Yahoo!'s market share in search has deteriorated.
Any of these things should have Yahoo! asking where to sign on the dotted line -- and then snickering "sucker" as the ink dried. Instead, we're at an impasse.
Normally, I would credit the passing of time as a bargaining chip for Microsoft. But if none of these events have punctured Yahoo!'s delusions of grandeur, it's time for Microsoft to start making its own luck.
Microsoft can't go back in time and stop itself from offering more than $40 billion for a company working on its third consecutive year of lower earnings. It can't turn its attention to smaller dot-com stars like IAC, CNET Networks (Nasdaq: CNET), or Time Warner's (NYSE: TWX) AOL.
However, if Yahoo! executives don't feel the urgency of Microsoft's bailout, Yahoo! shareholders probably do.
Microsoft needs to get Machiavellian. It needs to retract its offer, then be bold enough to issue a slightly lower bid. Then it needs to inform Yahoo! investors that every passing week without a favorable decision will reduce its offer even further.
It's time for Microsoft investors to start profiting from Yahoo!'s indecision. Let the Yahoo! executives hear the battering rams and the pitchfork rattles. Mr. Softy's not the one with the most to lose if this deal falls apart.
The House of Gates made a rookie mistake on that first date. Now that Yahoo! has made an even bigger blunder, Microsoft has a chance to get it right the second time around.
