REDMOND, Wash.--Microsoft went into more detail Thursday about its online spending plans, but offered few new details on just how it plans to catch Google.
In his remarks to financial analysts, CEO Steve Ballmer acknowledged that, in the search business, the company faces the challenge of needing to boost the number of search queries, attract revenue per share and boost revenue. While Yahoo would have offered a clear way around that Catch-22 by boosting Microsoft's advertiser base and query volume, Ballmer insisted he had other ideas besides a deal with the Silicon Vallery Internet company,
"There are other alternative approaches around this Catch-22 which I'm not going to talk about today," Ballmer said during yesterday's financial analysts meeting here.
He was pressed again later, but again demurred.
Ballmer did put a rough estimate to the cost of what he called "ante-ing up" for the next few years. Ballmer showed a slide that has the company expecting to pour 5 percent to 10 percent of its operating income into online search.
Several analysts I spoke to after the meeting on Thursday say they were disappointed Microsoft didn't offer more on the "how" in addition to the "how much."
In a research note, Bernstein analyst Charlie DiBona offered a glass half-full take, saying that although the detail was less than he hoped for, it was more than he expected.
Microsoft "addressed some but not all of the concerns about its spending and the performance in online businesses," DiBona said. He said a "hidden gem" was the assurance by Ray Ozzie that the company's services strategy will be fully fleshed out and made public over the course of this fiscal year.
"The net was a mixed bag, but but generally more constructive than most had expected... we got some clarity on spending but only more superficial assurances about the processes underlying spending decisions."
While Ballmer didn't go into details on Microsoft's Plan B, he did say emphatically that the company was moving on from Plan A: Yahoo.
"There is nothing under discussion between the two of us," he said.
CFO Chris Liddell put an even finer point on it, calling Yahoo a "declining asset."
"I think the chances of us buying Yahoo...are so small that they are essentially negligible," Liddell said.
REDMOND, Wash.--CEO Steve Ballmer said Thursday that its on-again, off-again talks with Yahoo are firmly in the "off-again" phase.
The two sides have talked on and off, he said, first about a purchase and then about a search deal.
"Now we aren't (talking) and that's where things are," Ballmer said, speaking at Microsoft's financial analyst meeting here. "There is nothing under discussion between the two of us."
Ballmer: No current talks with Yahoo.
(Credit: Corinne Schulze/CNET Networks)Ballmer's comments followed an earlier discussion of the continued investment (losses) that Microsoft expects as it spends money in its online business.
He repeated his familiar refrain that Microsoft will ultimately be able to rival Google with or without Yahoo.
"At the right price and with the right speed of operation it was a heck of good (option)," he said of Yahoo. "Yahoo for us was always a tactic, not a strategy."
Ballmer did acknowledge it faces a bit of a Catch-22 with search. With lower query volume, it attracts fewer advertisers and thus gets less revenue per query. That hurts its relevance with its ads.
He said there were other options around this Catch-22, but said he wasn't going to go into those Thursday.
And Ballmer did reopen the Yahoo door a crack. "Does that mean nobody will ever talk?...I suspect not."
Search unit head Satya Nadella said that Microsoft is also expanding its Facebook relationship into search. Microsoft will deliver an API (application programming interface) that Facebook can use to integrate both Microsoft's Web search and its paid search results into the social-networking site.
"That's something they will launch in the fall," Nadella said.
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.
Proxy fights often leave shareholders feeling black and blue, but when it comes to the battle of Carl Icahn and Jerry Yang, it's a case of gold vs. white.
Icahn on Thursday filed his preliminary proxy statement with the Securities and Exchange Commission, outlining the backgrounds of his proposed director slate and encouraging shareholders to use his gold ballots to vote in the upcoming shareholder meeting. Yahoo sent a letter yesterday urging shareholders to vote for its proposed slate on its white ballots.
In his proxy, which was well timed to coincide with Yahoo's reorganization, Icahn outlines some of the steps he would propose to the new board, if it is elected.
Icahn says he would propose to (and I'm quoting directly here):
•Eliminate the Change In Control Severance Plan;
•Hire a talented and experienced CEO to replace Jerry Yang and return Jerry to his role as "Chief Yahoo";
•Inform Microsoft that unless any "alternative transaction" can (ensure) a $33 or higher stock price, all talks of alternative transactions are over; and
•Offer publicly to sell Yahoo to Microsoft in a friendly and cooperative transaction.
Yahoo's current leadership, meanwhile, says that Icahn is distracting it from its work.
"It is time for Yahoo to turn its undivided attention to implementing its key strategies, and we therefore urge you to reject Mr. Icahn's slate and his ill-defined agenda," Yahoo said in its letter, which also made the case for its deal with Google. Yahoo is also gearing up for a road show with its investors.
The shareholder vote is slated for August 1. In the meantime, Yahoo shareholders are also said to be pushing to get Microsoft and Yahoo talking again, sources have told CNET News.com.
As a variety of forces swirl to push Yahoo and Microsoft back into each other's arms, some Yahoo shareholders are reportedly pushing for a deal that would see Microsoft acquire Yahoo's search business along with a larger stake, while paying less for Microsoft's shares than was previously offered.
According to a report by All Things D's Kara Swisher, some Yahoo shareholders have floated a proposal that Microsoft acquire a third or more of the company at somewhere between $30 and $32 a share.
As part of the search deal that Yahoo rejected, Microsoft offered to pay $35 a share, but was only offering to buy 16 percent of the company. Yahoo then inked a deal with Google, although that deal is non-exclusive and the parties said they were delaying implementation of the deal for 3 1/2 months to allow for antitrust issues.
News.com first reported on Monday that Yahoo-Microsoft talks were back on and on Wednesday reported that Microsoft CEO Steve Ballmer was weighing the issue. Swisher says her sources say that Microsoft is drawing up a new search proposal, but that formal talks have not taken place.
When Microsoft was looking to buy all of Yahoo, it initially offered $31 a share back in February and later hiked its bid to $33 a share.
Having failed to buy all of Yahoo, or even its search business, Microsoft is now looking to take an even more piecemeal approach--hire its workers.
Hmmm. Now who could Microsoft be targeting here?
(Credit: Microsoft)The company took out an ad in the San Jose Mercury News touting the fact that it has search jobs available in Silicon Valley.
"There are now very few companies that remain truly committed to defining the future of search and online advertising," the ad reads. "Microsoft is one of them."
Microsoft's not-so-subtle dig at Yahoo is particularly well-timed amid rumors that Yahoo is in a hiring freeze, or at least a cold chill and amid a rash of high-level defections.
In the ad, Microsoft touts its partnerships with Facebook, Viacom, and Dow Jones and suggests the fun of chasing Google.
"We have a long way to go," the ad states. "It will be an exciting journey. Come join us. We have jobs in Mountain View, Redmond, and around the world."
I'll be curious to see how the hiring push pays off. On the one hand, it would seem like for a whole lot less than $40 billion, Microsoft should be able to go on a pretty significant hiring spree. At the same time, I've heard of a lot of people leaving Yahoo, but haven't heard of any big names joining Microsoft.
But, I'm open to hearing about them. Hint. Hint.
With Yahoo now off having fun with Google, Microsoft is trying to convince its troops that the single life ain't so bad.
In a memo to those in his unit, Windows and Windows Live boss Kevin Johnson said part of the reason Microsoft abandoned its offer to buy Yahoo was that it viewed speed as of the essence if it were to buy the company.
"In a March 10th meeting in Palo Alto, we explained to Yahoo management the importance of reaching an agreement by the end of April in order to have an opportunity to complete the regulatory process by the end of this calendar year," Johnson wrote in the memo, which was seen by CNET News.com. "Because we could not come to an agreement on price by the end of April and given our concerns about Yahoo's business performance, we elected to withdraw our bid and pursue better options for Microsoft."
Once that didn't happen, Johnson said Microsoft moved on to explore another type of deal, details of which have dribbled out over the last day or so. Johnson highlights why he thinks Microsoft's deal was a better one for Yahoo shareholders.
Here's the full text of his e-mail (with exclamation points removed from Yahoo's name):
From: Kevin Johnson
Sent: Friday, June 13, 2008 2:20 PM
Subject: Update on our Yahoo discussions
I wanted to take an opportunity to provide my thoughts and perspective on the conclusion of our discussions with Yahoo, and its announcement of a commercial agreement with Google.
As I shared in my mail on May 18 (see attached), we have better options than a full combination with Yahoo at the price it suggested, and we have moved forward on our strategy to grow our online business.
Let me share a little background with you. When we made our original proposal on February 1st to combine with Yahoo, we offered a 62 percent premium that was based on a desire to reach an agreement in short order. The faster we could reach an agreement, the sooner we could begin the regulatory process and create value through this combination.
In a March 10th meeting in Palo Alto, we explained to Yahoo management the importance of reaching an agreement by the end of April in order to have an opportunity to complete the regulatory process by the end of this calendar year. Because we could not come to an agreement on price by the end of April and given our concerns about Yahoo's business performance, we elected to withdraw our bid and pursue better options for Microsoft.
During the last few weeks, we spent a considerable amount of time with Yahoo discussing an alternative proposal around search. Specifically, this search proposal had three components:
• Microsoft would have invested $8 billion in Yahoo at $35/share;
• Microsoft would have purchased Yahoo's search assets for $1 billion, and assumed the operations and R&D expense while returning data back to Yahoo for use in their advertising business; and
• Microsoft and Yahoo would have entered into a long-term search partnership, where Microsoft would have provided favorable economics to Yahoo search, including a three-year guarantee of higher monetization than Yahoo's Panama paid search system currently provides.
This partnership would have created a stronger competitor to Google, providing greater choice and innovation for advertisers, publishers and consumers. This approach could have been implemented quickly and would have simplified the integration process for both parties. It would have also established the basis for a long-term Internet partnership between Yahoo and Microsoft.
We believe this proposal would have created compelling value for Yahoo and its shareholders in at least three ways:
• New Transfer of Cash to Yahoo Shareholders. This proposal would have transferred $9 billion from Microsoft to Yahoo, which could have been used by Yahoo to reward their shareholders.
• A More Profitable Ongoing Business. This proposal would have resulted in higher operating income on an annual basis for Yahoo, with our projections more than doubling Yahoo's operating income in the first year of operation, and increasing it by more than $1 billion above its current operating income level.
• A More Compelling Search Offering. The combination of the search platforms would have unlocked new R&D innovation, eliminated redundant engineering efforts and allowed for greater scale in serving our customers.
Taken together, we believe that our proposal would have created total value for Yahoo's shareholders in excess of $33 per share.
Unfortunately Yahoo has chosen a different course, and yesterday announced an agreement that would start to consolidate over 90 percent of the paid search advertising market in Google's hands. This will make the market far less competitive. There are many experts who suggest that a host of legal and regulatory problems lie ahead for Google and Yahoo.
Regardless of Yahoo's decision, we will continue to move forward on our strategy in online services and advertising.
Since my mail on May 18, we have been making great progress. At our Advance '08 conference, we announced Live Search Cashback and Live Search Farecast, and the initial response to these user experience and business model innovations in search has been very positive. On June 2nd, we also announced a distribution deal with HP, the world's largest PC manufacturer, to install a Live Search-enabled toolbar on all HP consumer PCs planned to ship in the United States and Canada, beginning in January 2009.
We look forward to sharing more milestones and details on our plans as we head to MGX (the company's annual sales conference) and our Financial Analyst Meeting in July.
I remain confident in our assets, plans and people to succeed in building our online business. Thanks again for your commitment and focus.
Regards, Kevin
There have been a lot of stories since the Google-Yahoo deal was announced Thursday saying that Microsoft would be mounting a massive campaign to block the deal. But until now, I haven't seen Microsoft itself saying much about the antitrust implications of the actual deal.
After some asking, here's what I got back from Microsoft spokesman Jack Evans. It's not exactly a declaration of war, but clearly Microsoft is not giving the deal its blessing.
"Our position has been clear since April that any deal between these two companies will increase prices for advertisers and start to consolidate more than 90 percent of the search advertising market in Google's hands," Evans said. "Legal and industry experts agree that this would clearly make the market less competitive."
The real question now is which regulatory agencies, if any, take up Microsoft's position, as opposed to that of Google, which posted a blog Thursday saying the deal actually "preserves" competition.
"Quite simply, we think it is good for users, advertisers and publishers," Google Senior Vice President Omid Kordestani said in the blog. "By offering Google's industry-leading technology to Yahoo, the whole system becomes more efficient, and everyone benefits."
Yahoo and Google maintained that they didn't need regulatory OK to start the deal, but they have said they will wait three and a half months to give federal regulators time to "understand" the deal.
As part of Microsoft's last bid to acquire Yahoo's search business, it was willing to pay the search giant $1 billion in cash and also structure a deal that would have brought Yahoo $1 billion in operating income per year, a source told CNET News.com on Friday, confirming details reported earlier in the day by Reuters.
That deal would have seen Microsoft taking on the operations of the search business as well as its research costs, according to another source. In addition, Microsoft was willing to guarantee Yahoo better monetization than Yahoo gets from its Panama engine, that source said.
That was on top of another component of the deal, in which Microsoft would have paid $8 billion to acquire a 16 percent stake in Yahoo at $35 per share, sources said.
It's all part of an offer that Microsoft has said would have offered Yahoo shareholders more than $33 a share, though I'm still not totally clear on how that math works and whether it counts on Yahoo selling some of its Asian assets.
This was the deal that Yahoo ultimately rejected, saying search was too strategic, at the same time then inking a deal with Google to deliver some of those same search advertisements.
I can only imagine that all of these details are making steam come out of Carl Icahn's ears. The billionaire investor is now left either taking a loss on Yahoo or becoming a long-term shareholder. And that's not to mention the palpable frustration of those who were already long-term Yahoo investors.
With Microsoft and others certain to raise antitrust challenges over its pact with Yahoo, Google attempted to make its case Thursday for why the deal should be viewed favorably.
"Quite simply, we think it is good for users, advertisers and publishers," Omid Kordestani said in a blog posted on Thursday. "By offering Google's industry-leading technology to Yahoo, the whole system becomes more efficient, and everyone benefits."
Kordestani said that Google has already been in touch with antitrust authorities. "We have been in contact with regulators about this arrangement, and we expect to work closely with them to answer their questions about the transaction," he said. "Ultimately we believe that the efficiencies of this agreement will help preserve competition."
Microsoft has yet to comment, but it has previously indicated that it sees any deal that Google might strike with Yahoo as potentially anticompetitive.
One U.S. Senator, meanwhile, urged the deal get a close look.
"We will closely examine the joint venture between Google and Yahoo announced today," Senator Herb Kohl, Democratic chairman of the Senate Antitrust Subcommittee, said in a statement. "This collaboration between two technology giants and direct competitors for Internet advertising and search services raises important competition concerns. The consequences for advertisers and consumers could be far-reaching and warrant careful review, and we plan to investigate the competitive and privacy implications of this deal further in the Antitrust Subcommittee."
Here's the full text of Kordestani's blog:
Today, we announced a non-exclusive advertising agreement that will provide Yahoo with access to our AdSense for search and AdSense for content advertising programs on their U.S. and Canadian web properties. In addition, we will work to enable interoperability between our respective instant messaging services allowing users better, broader communication online.
We are proud of the advertising technologies we have built, which show users a relevant ad whether they are searching for a specific item or browsing the internet. This arrangement extends those benefits to Yahoo and its many users, advertisers and publisher partners. We currently provide similar services to sites like AOL and Ask.com as well as many other partners, and we work closely with all of our partners to ensure that our partnership drives their long term success.
Why did we make this agreement? Quite simply, we think it is good for users, advertisers and publishers. By offering Google's industry-leading technology to Yahoo, the whole system becomes more efficient, and everyone benefits:
Consumers will see more relevant ads when they are looking for information and browsing the Web. And with interoperability between IM services, users will have easier access to even more of their contacts.
Publishers currently in the Yahoo Publisher Network will benefit from Google's advertising technology, potentially increasing the revenue they earn from their sites.
Advertisers will have new ways to reach their target customers online more efficiently.
We also think this is good for competition. The truth is, this kind of arrangement is commonplace in many industries, and it doesn't foreclose robust competition. Toyota sells its hybrid technology to General Motors, even though they are the number one and number two car manufacturers globally. Canon provides laser printer engines for HP, despite also competing in the broader laser printer market. Google and Yahoo will continue to be vigorous competitors, and that competition will help fuel innovation that is good for users.
It is important to say what this agreement is not:
This is not a merger. Rather, we are merely providing access to our advertising technology to Yahoo through our AdSense program.
This does not remove a competitor from the playing field. Yahoo will remain in the business of search and content advertising, which gives the company a continued incentive to keep improving and innovating. Even during this agreement, Yahoo! can use our technology as much or as little as it chooses.
This does not prevent Yahoo from making similar arrangements with others. This arrangement is not exclusive, meaning that Yahoo could enter into similar arrangements with other companies.
This does not increase Google's share of search traffic. Yahoo will continue to run its own search engine and advertising programs, and the agreement will not increase Google's share of search traffic.
This does not let Google raise prices for advertisers. Google does not set the prices manually for ads; rather, advertisers themselves determine prices through an ongoing competitive auction. We have found over years of research that an auction is by far the most efficient way to price search advertising and have no intention of changing that.
We have been in contact with regulators about this arrangement, and we expect to work closely with them to answer their questions about the transaction. Ultimately we believe that the efficiencies of this agreement will help preserve competition.
The Internet is a healthy, competitive environment where content creators, advertisers and users come together to access information, communicate and create new business opportunities. We think this deal extends these benefits--it's good for users, advertisers and publishers and good for the industry.
