Round Two?
By Simon Bisson & Mary Branscombe in Editorial
Posted in Business, Internet, Microsoft on
So Microsoft walked away from its bid for Yahoo! after raising its offer to $33 a share.
I’m not really surprised at this result. As much as he’s like to think so Yahoo! isn’t worth the $37 a share that Jerry Yang was holding out for, and I really don’t think Microsoft wanted to go hostile considering the damage it would have done to the Yahoo! engineering teams it wanted. Yahoo!’s stated strategy would do much to destroy the company that Microsoft wanted, and that wouldn’t have been what anyone wanted. If the price had risen to more than $33 a share, and Steve Ballmer would have been risking an awful lot of additional gearing that would have ended up diluting Microsoft’s control of its own destiny.
So what’s next? One option is to for Microsoft to take the same approach it did with Borland in the 90s, when it failed to purchase the developer tools company. Instead Microsoft just started to hire the talent it wanted, bringing on board the skills it needed to give it a more mature development platform. If that’s the case here, then recruiters in the Bay Area can probably look for a bumper year as Microsoft starts to cherry pick the talent it wants from Yahoo!’s engineering teams. That’ll be considerably cheaper for Microsoft, though any results will take time to filter through its product pipeline. It took nearly 10 years for .NET to get to where it is today. There’s one problem though, in that Google’s checque book may be a little bigger than Microsoft’s - and unless Microsoft substantially increases the size of its Silicon Valley campus it’s going to be hard to entice developers to move from the balmy South Bay to the damp of the Pacific NorthWet.
The other option is, I think, going to depend on how the Microsoft and Yahoo! stock prices behave over the next quarter or two. The first few days of trading should see a steep drop in Yahoo!’s price, and an equivalent (but not so dramatic) rise in Microsoft. The spectre of a hefty gearing has depressed Microsoft’s stock, and the prospect of a payday has pushed Yahoo!’s up. If Yahoo! continues to trend down, its board is going to come under considerable pressure from institutional shareholders as to why it didn’t take the $33 offer. Yahoo! will end having to approach various suitors, but there won’t be a white knight until Microsoft comes in with a bid at around $28 (or possibly even lower) a share, which the Yahoo! board will be forced to accept.
That certainly seems to be what the market is expecting. Looking at the stock prices a day or so after Microsoft’s Microsoft’s share price rose, but not hugely, and Yahoo!’s hasn’t fallen all the way back to its pre-bid lows. Key shareholders are making a lot of noise about Yahoo!’s boards performance, and it looks as though Jerry Yang is going to be in for a rough ride. Yahoo! is going to have to pull out all the stops to get its new Yahoo! Open strategy announced at the Web 2.0 Expo up and running, and board-room turmoil will be an unnecessary distraction.
It’s still too soon to call it. The story’s not over by a long way - and the dealer’s just started to put down the cards for the next round. There’s a lot of money on the table somewhere for someone, and whatever happens over the next few months Microsoft gets the people and skills it wants for less than it was originally planning to pay, though the second option adds a few additional properties and the trauma of a merger…
–Simon
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