On June 27, Microsoft Chairman Bill Gates said he didn't think that his company and Yahoo would make a deal, adding that Microsoft CEO Steve Ballmer will find "plenty of other opportunities.
Not so fast. As Yahoo's quarterly earnings come up on July 22 (see Kara Swisher's take on the upcoming financial results) and the shareholder meeting on August 1, Carl Icahn and Steve Ballmer are teaming up to remake Yahoo's board of directors and shelve Yahoo CEO Jerry Yang. In a letter to Yahoo shareholders, Icahn said:
Steve (Ballmer) made it clear to me that if a new board were elected, he would be interested in discussing a major transaction with Yahoo, such as either a transaction to purchase the 'Search' function, with large financial guarantees or, in the alternative, purchasing the whole company."
Microsoft issued a letter today confirming Icahn's remarks about Microsoft's renewed interest in a transaction with Yahoo:
While, of course, there can be no assurance of a future transaction, we will be prepared to enter into discussions immediately after Yahoo's shareholder meeting, if a new board is elected.
Now the fate of Yahoo is clearly in the hands of shareholders. They can give Icahn a few seats on the board but not enough control to force massive changes or they can hand over the company to him and Microsoft, knowing that a transaction for $33 to $35 per share for the search business or the entire company will be consummated over the next six months.
As I have said before, Microhoo has always been about the money, and less about a shared strategy and cultural fit. Yahoo's board thought that Yahoo was worth $37 per share, and Microsoft wasn't going to negotiate against itself, with no other buyers in sight.
During an interview at the D6 conference, Yang said:
I understand the situation people are feeling, but at the same time we did not walk away from that proposal, Microsoft did. We are willing to do a deal under the right terms. It wasn't clear to me they wanted to finish the deal. I can't go revisit and take or not take it. I understand our obligation to stockholders from conversations with a number of them. The focus for us is how do we recognize more value for the company soon and position Yahoo to be much more successful in the long term. If there is a way to do it, we'll talk about other alternatives, but we aren't going to do something short term.
Yang has some regrets that Microsoft walked away from negotiations in May. He may prefer an independent Yahoo, but reality is setting in, and now he is probably wishing he and his board had played less difficult to get.
Update: Yahoo issued a testy statement regarding the Icahn-Ballmer "apparent effort to force Yahoo! into selling to Microsoft its Search business at a price to be determined in a future 'negotiation' between Mr. Icahn's directors and Microsoft's management."
In the statement, Yahoo invited Microsoft to make a proposal immediately and for Icahn to reveal his plan for Yahoo beyond teeing up Microsoft to make a deal. I doubt Jerry Yang and company are going to receive any kind of proposal until the shuffle at the upcoming shareholder meeting takes place.
On this week's EIC Squared podcast, ZDNet's Larry Dignan and I discuss this week's big stories. It was a busy week on the search front. Adobe is providing Google and Yahoo with Flash Player technology that allows their search engine crawlers to find and index SWF content, including Flash "gadgets" such as buttons or menus and self-contained Flash Web sites. It's good to make more information accessible via search engines. However, Microsoft has been silent on whether Live Search would index Flash content.
In addition, Microsoft bought Powerset for about $100 million to enhance its search platforms. It's not a substitute for acquiring market share via Yahoo Search, but it provides a foundation for making the search experience far more compelling and precise in fewer clicks.
Of course, the Microhoo drama continues this week with the latest rumors. Larry is ready for this opera to be finished.
Finally, we discuss a judge's ruling in Viacom's $1 billion copyright infringement suit against Google and YouTube.
U.S. District Judge Louis L. Stanton ruled that records of every video watched by YouTube users, including login names and IP addresses, should be given to Viacom's lawyers. Larry said it was like combining the worst aspects of a fishing expedition and a witch hunt. Viacom is maintaining that it won't look at personal data and Google is asking for time to anonymize the information. If Judge Stanton's ruling stands, the last shreds of personal privacy on the Web could be thrown out the window.
On this week's EIC Squared podcast, ZDNet's Larry Dignan and I discuss the executive exodus at Yahoo, the launch of Firefox 3 and Bill Gates' last days as a full-time Microsoftie. We also talk about the impact of millennials, the younger generation brought up digitally, on the corporate workplace. Will they turn off their Facebook, MySpace, iPod, and Twitter while they crunch numbers for a sales report or resolve configuration problems in a data center?
With the Microsoft/Yahoo/Google triangle taking a new shape as Microsoft exited and Yahoo and Google connected, the analysts covering tech industry sports are weighing in with their opinions.
Some Wall Street analysts believe Microsoft will take another run at Yahoo if the company can't get back on track or Carl Icahn wins his proxy fight to control the Yahoo board. That may be wishful thinking. Kara Swisher reports that Microsoft is done with its courtship of Yahoo and nothing will bring them back to the negotiating table.
Mike Arrington of TechCrunch called the Yahoo-Google deal a massive destruction of shareholder value, employee morale, and the Interent balance of power:
Yahoo's hatred of Microsoft runs so deep that they were actually, in the end, willing to destroy the future of their company just to keep it independent for a short while longer. They've ignored the wishes of their shareholders, employees and many now former key employees in killing that deal. And apart from Google, CEO Jerry Yang, President Sue Decker and possibly Tim O'Reilly, I don't believe there is anyone in the world that is happy with what has happened.
In a further lambasting post, Arrington called Yahoo desperate and possibly neurotic:
Quite simply, it looks to me like Yahoo is effectively paying Google off to step in and (1) keep Jerry Yang, Sue Decker and the current board of directors in power, and (2) avoid a desperation deal with Microsoft for as long as possible, or longer. It's not even clear to me that Google wants this deal, based on the terms. It almost looks like they're just doing Yahoo a favor, and trying to keep them out of Microsoft's hands.
At the other end of the spectrum, venture capitalist Fred Wilson thinks that Yahoo did the right thing by choosing Google over Microsoft as a partner.
Yahoo! finally woke up and did what they should have done years ago, cede search monetization to Google who simply does it better and will always do this era of search better than anyone else.
Now Yahoo! will do what it needs to do. Clean house, get lean, get out of businesses it shouldn't be in. Focus on what it's good at. And start making money and growing again.
They may need new leadership to do that. But selling this asset to Microsoft just because they had the wrong leadership and probably still have the wrong leadership is a mistake.
From my reading of the events over the last five months, Yang regrets that Microsoft walked away from the acquisition talks. "We all felt and understood a combination done right has a tremendous amount of power and leverage," Yang said during an interview with Walt Mossberg at the D6 conference.
Yahoo CEO Jerry Yang and President Sue Decker have a challenging set of quarters coming up.
(Credit: Dan Farber/CNET News.com)As a founder, Yang preferred that Yahoo stay independent and that he have the chance to turn the company around as CEO. Microsoft historically was not the kind of partner that Yang considered for a marriage. And his board of directors, led by non-executive Chairman Roy Bostock, seemed to go along with that line of thought.
But the entire affair turned out to be mostly about the money, as Decker admitted. "We never got through the price door," she stated during the same D6 interview. Yahoo's board believed that the company was worth more than $35 per share based on future promise, and Microsoft wasn't on the same page. In effect, Microsoft called Yahoo's bluff.
It also wasn't helpful that Yahoo was negotiating the search deal with Google at the same time Microsoft was pursuing its hostile bid. After months of rejection, Microsoft basically became less enchanted with the potential marriage, and despite the pummeling from the shareholders, Carl Icahn's camp, and the press, Yang and his advisors held out for more money.
Unable to come to terms with Microsoft on a generous deal just for the search business, Yahoo took the less complicated, non-exclusive Google deal that allowed the company to remain in the search game.
As I wrote in my post "The battle for Yahoo's soul," Jerry Yang and Sue Decker have a short runway--about six months--to prove that they can "redefine" the essence of Yahoo in a way that yields more revenue, profit, and positive buzz. With the continuing board room distractions, employee defections, and morale issues that go along with being under siege by various parties, the duo have their work cut out for them.
On this week's EIC Squared podcast, ZDNet's Larry Dignan and I discuss the celebrity interviews at the D6 conference, hosted by Walt Mossberg and Kara Swisher. Unfortunately, I called in from the San Diego airport United Airlines gate area, so you'll hear crying children and the ticker taker coaxing me to get on the plane. Larry gives the lowdown on Dell's earnings and the most recent security issues, patches from Apple, and the Comcast hack.
Continuing the exegesis of Steve Ballmer's remarks on how Yahoo should be viewed as part of "a" strategy to accelerate Microsoft's online advertising, but not "the" strategy, CNET News.com Executive Editor Jim Kerstetter and I attempt to make sense of the latest twists and turns in the Microhoo saga. Watch the video:
See also:
Steve Ballmer is changing the script in the Microhoo saga.
During a speech Ballmer made Friday at a tech conference in Moscow, Reuters reported him as saying, "Yahoo was never the strategy we were pursuing, it was a way to accelerate our online advertising business...We will spend money on some acquisitions. You can do a whole lot of things with 50 billion dollars."
Steve Ballmer
(Credit: Dan Farber/CNET News.com)The money must be burning a hole is his pocket, given how ready he was to hand it to Yahoo, when he now says that the combination was "never the strategy."
If Yahoo was never the strategy, what was the last three-and-a-half-month pursuit of Yahoo for nearly $50 billion? It makes Ballmer look like a flip-flopper, distancing himself from his previous hot pursuit of the Internet portal. In his initial letter to Yahoo's board on January 31, which was clearly not a love note but a business solicitation, Ballmer wrote:
While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence. Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo can offer a credible alternative for consumers, advertisers, and publishers. Synergies of this combination fall into four areas:
• Scale economics: This combination enables synergies related to scale economics of the advertising platform where today there is only one competitor at scale. This includes synergies across both search and non-search related advertising that will strengthen the value proposition to both advertisers and publishers. Additionally, the combination allows us to consolidate capital spending.
• Expanded R&D capacity: The combined talent of our engineering resources can be focused on R&D priorities such as a single search index and single advertising platform. Together we can unleash new levels of innovation, delivering enhanced user experiences, breakthroughs in search, and new advertising platform capabilities. Many of these breakthroughs are a function of an engineering scale that today neither of our companies has on its own.
• Operational efficiencies: Eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity.
• Emerging user experiences: Our combined ability to focus engineering resources that drive innovation in emerging scenarios such as video, mobile services, online commerce, social media, and social platforms is greatly enhanced.
From that letter, it would appear that Yahoo was a strategy, and it went beyond just search.
Perhaps Ballmer's remarks in Moscow could be construed as a way to avoid uttering the "Google" word. Yahoo may not be the grand ultimate strategy, but preventing Google from getting in bed with Jerry Yang and company is--hence, Ballmer's continued pursuit of Yahoo's search business.
In speaking with CNET News.com on February 20, Chairman Bill Gates laid bare the Yahoo bride, revealing Microsoft's real strategy (as opposed to "the" strategy) around Yahoo, which it is now pursuing:
We have a strategy for competing in the search space that Google dominates today, that we'll pursue that we had before we made the Yahoo offer, and that we can pursue without that. It involves breakthrough engineering. We think that the combination with Yahoo would accelerate things in a very exciting way, because they do have great engineers, they have done a lot of great work. So, if you combine their work and our work, the speed at which you can innovate and get things done is just dramatically more rapid. So, it's really about the people there that want to join in and create a better search, better portal for a very broad set of customers. That's the vision that's behind saying, hey, wouldn't this be a great combination.
When Yahoo played too hard to get, Ballmer came to realize that swallowing Yahoo whole perhaps wasn't as good a strategy for Microsoft as it was for Yahoo shareholders. Doing anything to stop the fast-growing Google, which will generate about half the revenue Microsoft does this year, is the strategy. Hence, pursuing Yahoo's search business on one end and Facebook on another front to create more inventory and ride the social-networking wave.
It all sounds a bit desperate. Perhaps it should be looked upon as an "evolving" strategy. What's clear is that Ballmer and Yang never had the kind of relationship that could lead to a marriage. In the end, emotion trumped "the" strategy.
On this week's EIC Squared podcast, ZDNet's Larry Dignan and I discuss the latest developments in the Microhoo saga.
It appears that Microsoft will do anything to keep Google from cutting a deal with Jerry Yang. In addition, we discuss the One Laptop Per Child XO-2 device, as well as the ongoing fascination with Twitter by the digerati crowd, despite the fact that the site is often out of commission.
The latest wild rumor circulating is that after doing a search ad deal with Yahoo, Microsoft will spend its cash acquiring Facebook for $15 billion to $20 billion.
At a press conference in Tokyo on Monday, Facebook CEO Mark Zuckerberg was asked about Facebook's future as a standalone company. "You can tell, from our history and what we've done, that we really wanted to keep the company independent, by focusing on building and focusing on the long term," Reuters reported.
Zuckerberg declined to comment on a follow-up question regarding the prospect of a sale. Microsoft invested $240 million to acquire 1.5 percent of Facebook at a $15 billion valuation. After walking away from the negotiating table with Yahoo, Microsoft's bankers supposedly had some conversations with Facebook about an acquisition.
Microsoft has not lost its lust for Facebook, which would be a much cleaner acquisition than Yahoo and provide a lot of ad inventory, though social-network advertising isn't as lucrative as search.
Here's some of the logic trail that could lead Microsoft to the conclusion that it could end up with deals for both Yahoo and Facebook. This can be viewed in the context of the four pillars of Microsoft's online strategy:
- Consolidate ad platform and win in display
- Innovate and disrupt in search
- Deliver end-to-end user experiences across the PC, the phone, and the Web
- Reinvent portal and social-media experiences
• Yahoo was surprised when Microsoft walked away from the table. Yahoo wanted $37 per share, and it threw the Google ad deal in Microsoft's face, so CEO Steve Ballmer withdrew his $33-per-share offer. Miscalculation on Yahoo's part.
• Since then, Yahoo shareholder lawsuits, plus Carl Icahn's buying up of shares and proposing a complete new board of directors for the July 3 shareholder meeting, have put serious pressure on Yahoo to rethink its stance.
• Doing a deal for Google to sell text search ads on Yahoo's sites would not only bring up possible antitrust issues, but it would also turn off Microsoft.
• Turning off Microsoft by getting in bed with Google would give those influential Yahoo shareholders--as well as disgruntled employees who view an acquisition by Microsoft as the right ending to the saga--more ammunition to fry Yahoo's board. So, it's wiser to keep the door open to Microsoft than to embrace Google to keep Microsoft out of the picture.
• Microsoft seriously needs to ramp up its search ad business. It has a deal with Facebook, but it lost out to Google on AOL and MySpace.com. How about taking over Yahoo's text search ads business as a way to gain inventory and to continue the tough love for Yahoo, which could then lead to a full acquisition, especially in light of Icahn's machinations and the shareholder meeting coming up July 3?
• As a bonus, announce the search ad transaction at Microsoft's Advance08 Advertising Leadership Forum this week.
• As the summer gets into gear, Microsoft will talk to Yahoo shareholders such as Icahn, various intermediaries, and eventually Yahoo, about a union at $33.50 per share.
• There is the chance that Microsoft will cool to a Yahoo acquisition--too many bad memories during the unfulfilled courtship--and just settle for a search ad deal to keep Google at bay. A joint venture for search covering both the search and advertising technology, as well as sales, would be a stronger play versus Google, but that might be hard to execute.
• Microsoft has been attracted to Yahoo for more than its search business. It has engineering talent, 500 million members, and some compelling services that would work across the MSN and Yahoo brands.
• If Microsoft doesn't acquire Yahoo outright, Facebook becomes more enticing. Zuckerberg has said many times that he plans on going public when the time is right.
• However, times have changed. Facebook has found that selling ads on social networks isn't as profitable as selling search ads. The company has reduced its revenue forecast for the year. The growth curve for bringing in new users has slowed somewhat, though Facebook is expanding outside the United States. Competitors such as Google, AOL's Bebo, and MySpace have not gone away, and the notion of data portability means that the walled gardens that keep people fenced into a social network are becoming porous.
• Thus, Zuckerberg & Co. might be more open to taking $15 billion to $20 billion now for their four years of work, rather than taking a chance on an uncertain market. I suspect that is what the elders are telling the Facebook management team.
• Now for the ideal scenario for Microsoft: acquire both Yahoo and Facebook. First, do the search ad deal with Yahoo to pre-empt Google on that front. Over the summer, acquire Yahoo as the pressure builds from shareholders such as Icahn. Finally, as Facebook realizes that its dreams of becoming the next Google are less certain, acquire the social-networking giant.
• If this scenario were to occur, Microsoft would have a lot of online territory. It's not as cheap as the Louisiana Purchase, and it's not clear how Microsoft would integrate and leverage the various platforms and audiences.
The 35-year-old Microsoft has a long-term view, and has been known to be persistent and tenacious. However, it's not clear that by cobbling together and integrating different services, Microsoft can lead the way to Web 3.0.
In this week's EIC Squared podcast, ZDNet's Larry Dignan and I discuss the latest news from SAP, Sun Microsystems, Advanced Micro Devices, and Microhoo. At SAP's Sapphire conference this week, company executives explained the delayed rollout of the new on-demand enterprise suite, Business ByDesign. SAP CEO Henning Kagermann said that the total cost of ownership (TCO) equation on Business ByDesign and the upgrade procedures weren't good enough:
"We know we can have TCO, but need NetWeaver enhancements. There's a very close link between the TCO of Business ByDesign and NetWeaver. The TCO is not so much hardware; There are too many processing steps in our hosting. We can continue to do manual steps when first upgrade Business ByDesign from 1.0 to 1.1, but it's not predictable in way where every client got it at once and in the same way."
Larry remarks on AMD's lack of transparency about its chip fabrication plans and product roadmap, and I recap my visit to JavaOne, where I met rocker Neil Young and interviewed Sun CEO Jonathan Schwartz about his plans for JavaFX and cloud computing. Schwartz has a good plan, but getting developers on board will take some heavy lifting.
We also debate whether Microsoft is open to a union with Yahoo after the parting of ways.
