It's rare that Microsoft doesn't get what it wants, and it really wants Yahoo!
The Redmond brass withdrew its $33 per share offer this week after Yahoo king Jerry Yang balked at its updated proposal - but the negotiations are far from over. Yahoo! Investors are fuming, so much so, that some pundits claim that negotiations are already back underway with Microsoft CEO Steve Ballmer -- and reportedly without Yang at the table.
And who could blame shareholders in such an unpredictable and uncomfortable economic climate? Microsoft's latest $33 per share offer was less than the $37 ante proposed by Yang but still a lovely premium for the $25 Yahoo! stock is selling for today. Microsoft's $47.5 billion offer for a company with a $33.7B market cap -- a 70 percent premium on the $44.5 billion originally offered -- is nothing to sneeze at and investors know that.
Jerry Yang is right in saying that Yahoo! is a premium brand but the online service's future success is not guaranteed. Former portfolio manager and BigTrends analyst Bob Lang points out correctly that Yahoo! had Geocities, Broadcast.com and search services up and running long before its rivals but failed to convert those Internet properties into hard cash. In the interim, newcomer MySpace snatched up the lucrative social networking business and Google ate Yahoo's lunch with YouTube and paid search.
C'mon Jerry: it's not the dot.com days before the bubble burst. The money actually has to be on the books or darn close to it before Wall Street will crown you king. Given Yahoo's track record on that front, Yang should have considered the $5 billion "enhanced offer" more seriously. Yahoo insiders may not love Microsoft but they know that flirting with the enemy -- as Yang has done with Google -- is dangerous and could translate into more customer defections than paid clicks.
Ballmer was no doubt pleased and quite clever to illuminate (and enumerate the negative impacts of) this foible in his withdrawal letter, a sudden and somewhat unexpected about-face to a rocky courtship that many thought would lead to a hostile takeover.
Microsoft's sudden passivity (especially on such an inordinately strategic deal) is suspect at best, and suggests to this humble observer that it is merely a prelude to -- or part I of -- negotiations 2.0. It appears many on Wall Street wanted this deal to happen and Microsoft's savvy and skillful walk from the deal has generated far more good will than a hostile takeover.
Ballmer's publicly-released Dear John letter to Yahoo! was belittling to Yang, no doubt part of a thinly-veiled campaign to have him removed from the negotiation table. And the tone of the note was far too cordial for a guy who hates to lose.
Bill Gates' reiteration of Microsoft's "firm" decision to retreat from the Yahoo deal at a Tokyo press conference today only reinforces my suspicion that there's chatter going on between Redmond and the other financial powers that be in Sunnyvale.
Microsoft's top brass are extraordinarily smart businessmen and skilled negotiators, and if they can't get something done publicly, they get it done quietly. When they were unable to persuade VMware to join the team, for examply, they moved on and did the next best thing, first striking a deal with VMware rival XenSource, and then ensuring that its closest software partner -- Citrix -- made an acquisition Microsoft simply could not do. XenSource is open source, after all.
Bill Gates' day-to-day activities at Microsoft will end in July. I don't think a failed merger with Yahoo! is the way he wants to go out. And I'm sure it's not how he wants historians to cap off his business biography. A deal with that online services giant, or an acquisition of Facebook or other Internet property, is still in the cards.
