There's enough excitement in the technology industry these days to get your head spinning.
Yahoo! (Nasdaq: YHOO), fighting off offers from software behemoth Microsoft (Nasdaq: MSFT) since February, is now in talks with former Internet juggernaut AOL, the Internet division of Time Warner (NYSE: TWX). Microsoft hasn't given up hope, though: Some reports say Mr. Softy is considering a joint bid for Yahoo! with Rupert Murdoch's News Corp. (NYSE: NWS), owner of MySpace.
Meanwhile, Yahoo! has just announced that it will test the use of Google's (Nasdaq: GOOG) AdSense advertising engine in some of its search results. The companies had been directly competing in that area up until now.
Wow. That's a lot of news in a small chunk of time, and from some pretty enormous players. It's enough to make you scratch your head as you try to figure out how to make some money from the developments. After all, shares of Yahoo! have gone from $19 just before Microsoft made its offer to $28 today. You see that, and you might think you've already missed the boat.
Before you get swept up in all of the exciting headlines, take your finger off the "add to cart" button and start doing some value-investor thinking.
Just yesterday, an opinion piece by value investor and hedge-fund manager David Einhorn of Greenlight Capital found its way to my inbox. Buried in a deep analysis of the ongoing problems of the financial industry was a comment that Microsoft was among the long positions that Einhorn holds. And it's fair to say that Einhorn is as good as they get in the investing game.
I've seen this pick come up on a lot of value investors' radars, and I just don't get it. Microsoft is cheap in the historical sense, but not when you consider other investment opportunities or changes in the competitive landscape.
The technology industry -- software in particular -- changes so quickly that you'd have to be head of the class in the prediction business to pin it down. Just think about the players I mentioned earlier. Ten years ago, AOL was the online player to beat, Microsoft seemed unstoppable, MySpace didn't exist, and Google was being cobbled together by two guys in a dorm room.
Today, AOL seems to be grasping for straws, while Microsoft, with its MSN division having been unable to build up steam, seems to be trying to make just about anything stick so it can stay relevant in the online space. Google is now the company that looks unstoppable, and Microsoft's Vista is, by all descriptions, a flop.
This doesn't sound like a space where I want to place a long-term bet on. Today's market offers plenty of easier fish to fry.
The software-as-a-service model seems to be slowly supplanting the more traditional licensing business that Microsoft is so good at. I run all of my email, calendaring, and other daily management tasks online through Google Apps -- for free. People often get wide-eyed when I tell them that I live a life free of Outlook and Exchange. Not only is it possible, but it's also relatively easy, and with time, it will only get easier. Another good example is Google's introduction of email archiving services, launched through Positini on the Google "cloud."
In an instant, Google took a business that Microsoft (through Frontbridge, now Exchange Hosted Services) and others have been selling with entry costs in the thousands of dollars and made it available to individuals and companies of all sizes for as little as $25 per year per account. That's pretty dramatic, and the value-investor cash-cow models for Microsoft can change pretty quickly when a competitor can offer similar services for free.
Is Microsoft going to be in trouble in three years? Will an AOL/Yahoo! combination be able to compete effectively with Google? Is Facebook the next Google? I have no idea. But the nice thing about investing is that I don't have to know, and I don't have to be good at making these predictions. I'll sit back and let others make those bets while I dig around for something more my style: Think American Express (NYSE: AXP), Target (NYSE: TGT) or one of the dozens of other cheap businesses out there.
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