A new page is turning in the Microhoo saga. Microsoft's
The game is about to turn, with analysts torn as to whether Microsoft walks away, ups the ante, or launches a proxy battle to take Yahoo! by storm.
Let me state the obvious. Yahoo! doesn't want Microsoft. It doesn't need Microsoft. And even if Microsoft is trying hard to tell itself otherwise, it doesn't want or need Yahoo!, either.
Rather than go into an emotional rant about two stubborn companies at an impasse, let me spell out the reasons why Microsoft should just pick up its ball and go play somewhere else.
1. Microsoft can't lose in walking away
All roads lead to Google
If Yahoo! has the tools to succeed, it can do so without Microsoft's billions. In other words, if Yahoo! is worth more in the future as a standalone company, it is because it was able to eat away at Google's market share. If Yahoo! is destined to continue to shrink in relevance, then Microsoft is saving its own shareholders tens of billions in dilution for a fading company.
In other words, Microsoft already has a free ticket on Yahoo!'s feast or famine. It doesn't need to buy.
2. Display advertising is not the future
This morning's bleak report out of Time Warner's
Yahoo! is no slouch when it comes to display advertising. The problem is that it's the wrong game at the wrong time.
3. Traffic can be acquired cheaper
If display is paid search's ugly cousin, isn't Microsoft overpaying for what amounts to a ton of page views? If so, Microsoft can get more value for its money elsewhere. Yahoo! is the Internet's top draw, but there are plenty of eyeball magnets that can be had for more pedestrian multiples.
AOL is attracting 110 million unique domestic visitors every month. CNET Networks'
4. Yahoo! can be had for less, later
What will happen to Yahoo!'s stock if Microsoft walks away? It will head lower, but how much lower? The stock was trading in the high teens when Microsoft first made its bid, but its fundamentals haven't improved. There have been layoffs, the company has relinquished more market share to Google, and even the value of its Asian investments has diminished.
This doesn't mean that Yahoo!'s stock will be cut in half if Microsoft walks away. It may very well retreat to no less than the low $20s, under the assumption that Microsoft can always come back with a $20-ish offer after the blood has been spilled at Yahoo!
And you don't need Daniel Plainview sipping milkshakes to let you know that there will be blood. The moment Microsoft convincingly walks away, shareholders will turn on the executives who argued that an offer of $31 a share undervalued a company that couldn't trade above $20 a share through its own efforts.
Yahoo! executives sealed their fate, since their argument against the buyout was actually a confession of incompetence in creating shareholder value. Changes will come, and since it's unlikely that Yahoo!'s fortunes will improve during the morale-crunching boardroom turnover, the new regime may be more receptive to Microsoft's lower offer.
If I'm wrong about this, revisit the first point, because Microsoft wins if Yahoo! succeeds.
5. Microsoft needs the money
The cash portion of Microsoft's offer for Yahoo! would nearly drain the company's coffers. Yes, Microsoft is a money tree, with $26.3 billion in cash and short-term investments as of the end of March. If it spends $22 billion of the cash portion for Yahoo!, it will just make more. However, last week's quarterly report -- in which its bread-and-butter operating system and productivity-suite software business took a hit -- was a sign of vulnerability. (Does everybody hate Vista?)
Microsoft's not out to buy Yahoo! just because it's going through a midlife crisis. That's what convertibles and Harleys are for. Microsoft needs to diversify into new high-margin growth areas, and since video game software was the real star this past quarter, it may as well start looking at companies such as Activision or Take-Two before it starts upping the ante on Yahoo!
With or without Yahoo!, Microsoft is going to have to buy its growth going forward. It just doesn't make sense to spend so much on a deal that wins page views without duplicating what sets Google apart from everyone else.