Yahoo, Microsoft and the Art of Corporate Courtship

13 Feb

Our friends at TechCrunch, WSJ  and elsewhere began reporting earlier today — with some authority, apparently — that Yahoo has now begun full-on courtship with News Corp and, I suspect, several other players to be mentioned later, in its attempt to stymie its impending consumption (and eventual digestion, if I had to guess) by Microsoft — at least at the $31-per-share number inherent in the current bid.

As a tried-and-true horror movie tagline might suggest, “this time, it’s personal.” You bet it is! I would have to dig deep into the annals of tech M&A deal-making of the past decade to come up with an analogous deal that rose to this level of bilious back channel sniping, posturing, and disinformation. As my friend and former b-school classmate, Revolution Partners investment banker Peter Falvey, first commented on this story, it’s exceedingly hard to tell whether this is a thinly-veiled attempt by Yahoo to drive up the valuation,or it’s just a clear indication that Yahoo really, really does not want to be acquired by Microsoft. Surely, the  blogosphere’s “Anybody But Microsoft” contingent is claiming some kudos are in order.

It goes without saying that it comes as a surprise to no one that Yahoo would be somewhat less than *ahem* enthusiastic about a proposed Microsoft acquisition. Furthermore, it is considered fairly standard M&A gamesmanship to play one suitor off the other in the interest of conveying, well, disinterest about the suitor’s plans along with a sense that there are many options out there for the target. In the vast majority of cases, this all falls under the “dating dance” all companies do; and, more often than not, a deal is ultimately consummated with the original suitor, albeit at a slightly richer valuation and some additional perks thrown in for good measure. The other “interested parties” are usually just being used to gin up the bid price. Sometimes those phantom buyers are complicit in the dance, extracting their own strategic advantages in watching the suitor sweat a little. In keeping with the implied code of M&A modus operandi, the parties typically laugh it off at the closing dinner and everything is smiles and handshakes all around. All in good fun, right? In this case, hardly.

Objectively speaking, a News Corp/Yahoo partnership, investment or other combination does make some sense.  Rupert Murdoch benefited from great timing and foresight in acquiring MySpace for the now-paltry sum of $580mm three years ago. That said, while the MySpace user base has continued to expand exponentially, the same cannot be said for the assumed monetization opportunities inherent in that deal. [Separately, but relevant to this issue, Google has cited disappointing results from its ad partnerships with MySpace and other social networks and appears to be backing away from similar deals in the future, at least as they have been structured to date.] Mr. Murdoch knows this all too well and realizes that the issue needs to be addressed.

A Yahoo deal could alleviate a lot of issues for News Corp but I can’t seem to get past the idea that Messrs Yang and Murdoch will never come to an agreeable figure on how to value MySpace. As such, I think it would be, at best, a long shot that anything substantive comes out of these discussions — and certainly nothing that will materially change the fundamental problems at Yahoo. I have been an outspoken critic of the valuation silliness of social networking companies for some time. Conveniently enough, I was quoted in recent days in two separate San Jose Mercury News pieces (here and here) on the Microsoft/Yahoo drama where I pointed to the problem that Microsoft’s 1.6% investment in Facebook has done to “anchor” a $15 Billion implied valuation in the minds of social networking company management teams (and some investors) and how that has stymied constructive deal-making in this space. I remain equally committed to that position today and will happily go on record as saying I consider a $15 Billion valuation currently for Facebook as absolute folly.

So, back on planet earth, options for Yahoo remain right about where they have been for some time, despite the dust being kicked up by all this supposed courtship talk with AOL, News Corp, Google and the like. Odds are still probably 70/30 that a Microsoft bid will be ultimately accepted (but at a higher figure, natch). The other two scenarios: NewsCorp cuts a deal with Yahoo, Microsoft goes to the mat; or, NewsCorp and Yahoo cut a deal and Microsoft folds its tent, are distant options given the immense complexity and sticky valuation discussions that must be played.

As Dennis Miller might say, ‘anyway, that’s my opinion; then again I could be wrong.’ (But I doubt it.)


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