Regardless of how one might feel about its trashy image or broadsheet approach to journalism, The New York Post had a way of capturing a dramatic moment in world or business news and boiling it down to its purest essence. Diplomacy, tact, and nuance be damned. In my early school days in NYC — back during the Punic Wars — I remember regularly seeing bold-type New York Post headlines on such weighty matters as US-Russian SALT-II talks summarized in the paper’s unique, inimitable style: “Prez to Gorby: Drop Dead.”
News that broke over the weekend — leaks, really — that the Yahoo board would reject Microsoft’s $44.6 Billion offer for the internet company stirred up some of those old memories. How would the media spin this: as an expected and par-for-the-course rejection of a bidder’s initial offer to a target company in an effort to gin up a higher price?…or as one more salvo in a once-simmering, now roiling, war of words between two famed technology CEOs with years of scar tissue built up between them over years clashing in the marketplace? Perhaps both angles would get played; and, were that to be so, would that not be a somewhat accurate description of what is now taking place?
A rumor is just a premature fact, it’s been said. This pending rejection from Yahoo of the Microsoft offer should be a surprise to almost no one. While the formal rejection letter (like the initial letter from Ballmer & Co.) will be parsed and diced and sliced by all manner of market analysts, the effect will be the same: both companies need to get a deal done. What that deal eventually looks like may differ greatly from where it sits today, but both companies have few options, and not terribly attractive ones at that. All the more reason to back off on some of the heated rhetoric and posturing that can only damage both parties and jeopardize a potentially successful combination. A Pyrrhic victory for Microsoft would serve no one’s interest, except perhaps for Google.
In my view, Microsoft may have overplayed its hand here. To be sure, both parties are getting well-paid and competent counsel in the form of Lehman Brothers, Goldman Sachs, Blackstone Group, Morgan Stanley, and others. That said, I have to wonder whether the shot-across-the-bow move on Microsoft’s part of an open offer — thereby, effectively blind-siding Jerry Yang and tying his hands to a certain extent — was particularly well-advised. Ballsy, sure; but just how smart was it?
The $31-per share price — while well over the trading price of Yahoo stock the day before the announcement — is still well under the break-up value of the company, regardless of what banker you want to hire to do a fairness opinion. $35-42 a share is probably where the real value is. So, on that basis alone, the offer is a non-starter.
Second, where is the implied strategic value here for Microsoft in its offer? At $31 a share? Really? This just doesn’t square with Microsoft’s public statements and rosy proclamations about how much they respect and value Yahoo and its team. As Tony Soprano might say, “Paulie, the envelope’s kinda light.” You bet it is. About $12 Billion light. What’s $12 Billion among friends, you say, Mr. Ballmer? About $12 Billion.
Clearly, Microsoft is seeking to acquire Yahoo for strategic purposes, not for an arbitrage play. We are not talking about some buyout shop dismantling a struggling airline and selling off the planes to the Mexicans and the hangers to the Bezzleburg brothers to build condos on. This isn’t Blue Star Airlines, thank goodness. Yahoo is a powerful brand with — in spite of recent defections — a solid team. Microsoft needs to retain that team in a post-acquisition scenario if this deal is ever going to make sense. Coming in with an offer below break-up value, without any reverse-break-up fee provision to allow for regulatory snafus, and without other sweeteners typical of a deal of this size and this high of a profile is just not terribly constructive.
I trust the conference rooms at Redmond are at this moment filled with bankers and senior executives combing through Jerry Yang’s “Drop Dead” letter to Ballmer & Co that will show up in tomorrow FedEx. and thinking of a more reasoned approach. I also trust they are taking stock of their go-for-the-jugular tactic the first time around and re-adjusting their fire. Truth is, the options on both sides are not terribly appealing. Poison pill provisions in place at Yahoo would make a truly hostile run at the company by Microsoft a very costly and largly losing proposition on Microsoft’s part. Microsoft needs Yahoo intact and as on board, if that is even possible, as can be arranged. Calmer heads will hopefully prevail here. Yang’s rebuttal that Microsoft’s offer “massively” undervalues the company is just shrill, but it speaks to some serious friction here on a personal level between the Yahoo and Microsoft executive teams.
There is probably a sizable contingent at Yahoo that would rather commit seppuku on a figurative level than come under the thumb of Microsoft. Microsoft and its advisers would do well to better understand these sensitivies and to think twice about proposing another offer than smacks of an opportunistic land-grab at a company back on its heels. Microsoft should construct a better financial offer promptly. Microsoft has been known to overpay for deals (Facebook, anyone?). The company is again paying a lot of money for good strategic advice here, but in this case, overpaying could be the best advice of all.