History provides some insight on Microhoo

Microsoft's announcement Monday that it was open to a new Yahoo deal, but only with a new board, struck some as odd. Wouldn't it be better for Microsoft to reach a pact now--with Yahoo's board on the ropes and ahead of its proxy showdown?

Perhaps, but I think Microsoft has come to the conclusion that it just can't deal with Yahoo's current board, regardless of how badly it might need Yahoo's scale.

Over the July 4 weekend, I read Barbarians at the Gate, the classic business tome about Kohlberg Kravis Roberts' takeover of RJR Nabisco. The book has many lessons that are applicable in this situation.

• Don't assume the other party has the same understanding from a meeting as you do.

• Not everyone who is interested in an asset is really willing to step up to the plate.

• Don't expect competitors to stand still.

And that's just to name a few. But the most important thing I took away was how important the human relationships were in determining who was willing to do a deal with whom.

Throughout the RJR saga, various players link up with one another or go separate ways in large part based on their personal relationships. In the end, the board of RJR Nabisco was faced with two bids. Neither was definitively better than the other. Its decision, to go with a buyout firm as opposed to its own management, rested in no small part on the fact it had lost confidence in and respect for the individuals in that management group.

In my mind, the reason is simple. Large transactions involve a whole lot of guesswork about the future. Such deals are a bet on what a business will be able to do. Since it's hard enough to predict one's own financial future, it's doubly hard to do so for another entity. That makes it all the more important to have trust in one's merger partners.

[dascha1]

I see your analogy in this. However, RJR may not be the best example to boost your basis. For instance, how's the cigarette market doing in Asia these days. Likewise, Ginter made his 3rd success from cigarette automation and erected famous buildings in other historical names. He learned from his mistakes more than anything.

[benjaminstraight]

I see the analogy...

[winstein]

Microsoft is thinking: If we can't buy Yahoo for cheap, then we'll sabotage it as a competitor.

[Kwasiowusu]

Jerry Yang is the one sabotaging his own company because of his gargantuan ego. He seems to have forgotten that Yahoo is not his private property, but a publicly quoted company, with shareholders, who have invested their IRA's and 401 K's in the company, and he is there to act in the interest of shareholders. He is not there to stroke his own ego, and show what a big shot he is.
Refusing a massive over 60% premium on Yahoo's previous price, is about the worst thing he could do to shareholders, especialy at a time when the markets are down a lot, and hard working Americans, who have put their retirement savings in stocks are suffering.
As for Microsoft, it's Microsoft's business to strongly compete against Yahoo, just likie they compete with anyone else. It's a bit rich for Jerry Yang to go whining to mama, with his "Microsoft is destabilizing Yahoo" crap, when the same Yang, has been attacking Microsoft non-stop since this saga started.

[Penguinisto]

You see, posts like yours explain perfectly why Yang is a CEO of a large corporation, and you're still inhabiting either the help desk or your mother's basement. In any corporate dealing, there are always factors well beyond your knowledge (esp. yours), that require a lot more research and time than one would otherwise be bothered to commit to w/o a serious incentive to do so.

[Penguinisto]

You know something? I finally figured out *** Microsoft is trying to do. You see, MSFT is currently licensing a patent from Yahoo over paid-search... and so is Google. If MSFT gets Yahoo, they can then do two things: 1) be free to do paid-search, and 2) jack up the licensing terms so that Google has to pay MSFT dearly for what is essentially Google's bread-and-butter. The patent in question is # 6,269,361 Yahoo got the patent when it bought Overture. If Yahoo were to make the current deal w/ Google a permanent one (or better, sell the patent to Google), MSFT would simply and quickly go away.

[Penguinisto]

BTW - a correction - Google already has a perpetual royalty-free license for the patent, but YHOO selling it to Google (for a big fat multi-year payment) would stick it to Icahn, MSFT, and at the same time make them go away permanently.

[Penguinisto]

Some corrections - it seems that Google already has a perpetual royalty-free license to the aforementioned patent.... but MSFT does not. I still believe that this patent is the one and only thing MSFT is after out of Yahoo though - and MSFT will likely dump the rest into the river.

[jodpur]

Kwasi, in all of your infinite wisdom, you are forgetting a couple of things.

First, Yahoo is not an old Fortune 500 behemoth. It is a Business 2.0 company. The rules are not quite so clear on how to run New Business. I assure you they are much different than the GE and GM of yesteryear. Indeed, Jerry Yang is protecting Yahoo, but mostly because he is one of the single greatest shareholders, with much to lose or gain.

Finally, Microsoft has seen the LAST of their glory days. This is nothing but a last gasp effort. They know nothing about running an Internet company. Let's see, what have they done successfully on the Internet? Hotmail? Nope.

MSN? I think even they admit that to be a failure (people have learned how to reset their browser homepages).

What the heck is Windows Live anyway?

Microsoft is a bad fit for Yahoo....period. Business sense, cultural...no matter how you look at it. If you want to make a quick buck on the Microhoo deal, yeah those are the people who will benefit, but no long term benefit exists for either company.

[frank1307]

Kwasi is on track you are confused. Yahoo is public. It does not matter how cool or webby it is. Anyone including Carl Icahn can buy a piece and if they do they can vote their shares. You are correct that Yang is a sizeable shareholder. If Yang was thinking rationally as an investor he would fire himself and vote his shares with Icahn. On the other hand Yang probably did not purchase the shares but rather was awarded the shares to compensate him for his excellent mangerial skills. If this is the case he knows once he is no longer involved with the company the gravy train will grind to a halt. This may explain his reluctance to do the right thing for Yahoo shareholders.

One question I have about Yang's ownership is how many of his shares were awarded for his brilliant leadership of Yahoo.

[Penguinisto]

There's no confusion here - Yahoo is not GE, not Exxon, not ADM. The business environment is vastly different for tech corps, even between any two subsets of the tech industry. Yep, Icahn can buy a piece of it, but that doesn't mean he gets to own it until he buys enough pieces of it, and there are a lot of ways to prevent that from happening. frank1307, you're missing one big, glaring, obivous piece: Icahn doesn't have Yahoo's best interests in mind, nor the shareholders'. Icahn is only out for a quick buck. Most shareholders are out for long-term growth and gains.

[JCPayne]

Lets look at some failures looming for Microsoft.

1) MSN TV.... Do you know anybody withan actual WebTV aka MSN TV today??? Microsoft threw big money at this.

2) XBox 360's with HD-DVD... Again more big money down the drain HD-DVD was backed by Microsoft in a big way and it has gone the way of the old BETAMAX technology.

3) "The Microsoft Network" (since already been rebranded MSN) and still trailing the others.

4) Microsoft/MSN Passport... A.k.a LIVE now or something like that.

5) Microsoft's search tool... No THANKS I'll continue Googling all the way home...

6) Windows Mobile is really about to Implode now that Symbian OS (Used by Nokia, Sony Ericsson Etc.) is going open source. PLUS you still have Andoid (backed by Google and many others ready to rock M$)

7) FireFox is eating more and more market share from M$.

8) Do you really need a "touchable" end-table / coffee table in your living room drawing electricity for the heck of it? Not to mention, each of those "touchable tables" will be two more proprietary Microsoft O/S licenses in your home which you'll have to pay for in future.

9) People are seeing no need to upgrade with Microsoft's expensive technology any longer...

Microsoft really is in their final throes and the YAHOO attempt is proof of them trying to get rid of Yahoo so they can compete better. More like Microsoft is trying to dumb-down the technology market so they can compete.

[aintnorainbowdorothy]

Don't know about using M$. After all, Microsoft is a publicly traded company, as is Yahoo. Jerry Yang hates Microsoft and let his ego get in the way of a deal that would enhance shareholder value a ton. And yes, Microsoft wants that patent. Who wouldn't? However, if Microsoft buys Yahoo, and it's probably going to happen with Icahn a major stockholder, then the agreement with Google goes the way of the wild goose. That means that Google would have to pay Microsoft a royalty, which would be a hoot. As for search, I use Ask.com and Live search. I get the same results with fewer hits on useless garbage that Google throws at people. I don't click on ads since none interest me. That means I get to use search for free. Let us face it. Google is going too fast too quickly. Wonder when their profits will suffer becase of it. Microsoft makes its money by subscriptions. With Yahoo in the fold, those subs woould make them even more money. There is common sense (an oxymoron if ever there was one) in that bid. And now Microsoft is going to get Yahoo for less. There is no evil empire. It's just a company trying to increase shareholder value. Quit knocking Microsoft unless you want to knock Google and their useless motto.