Yahoo! Can’t Say No

The logic of Microsoft’s brilliant bid.

Also in Slate, Daniel Gross explains what Microsoft’s bid for Yahoo! means for the economy and for Google, and Chris Wilson argues that Microsoft’s play to purchase Yahoo! isn’t about search.

How do you buy a company that doesn’t want to sell? You take a page from the Rupert Murdoch playbook. If Microsoft’s semi-hostile bid for Yahoo! sounds familiar, that’s because Murdoch just used the same brilliant move to steal the Wall Street Journal away from the Bancroft family.

Knowing the Bancrofts would tell him to get lost, Murdoch went over their heads—directly to the thousands of other Dow Jones shareholders who didn’t have their identities tied up in owning the company (and to the less-committed Bancroft relatives, whose eyes lit up when Dow Jones’ stock nearly doubled). Specifically, Murdoch made an offer that was so much higher than the current stock price that all but the most committed Bancrofts viewed it as a once-in-a-lifetime bonanza. A month or two later, yielding to enormous pressure (and greed), the rest of the Bancrofts caved.

For the past 18 months, in an effort to turbo-charge its perpetually weak Internet business, Microsoft has been trying to buy Yahoo!. Each time, Yahoo!’s management has declined the offer, preferring to go it alone. In recent months, however, Yahoo!’s latest “turnaround” effort has stalled, the stock has plummeted to a level not seen in four years, and shareholders have grown increasingly impatient and frustrated. This opened the door for Microsoft.

Two days ago, according to Silicon Valley journalist Kara Swisher, Microsoft made the latest of several informal, behind-the-scenes overtures for Yahoo!. This time, however, it added a condition: Yahoo! had two days to respond, or Microsoft would take the bid public. Yahoo! didn’t respond. And this morning, Microsoft followed through on its threat.

The result? Microsoft has made an offer Yahoo! can’t refuse.

The $31-a-share bid represents a 62 percent premium over the pre-offer closing price. It also looks like manna from heaven to Yahoo!’s beleaguered shareholders. Yahoo! CEO and founder Jerry Yang and the rest of the Yahoo! board won’t want to sell, but now they’ll have no choice. A refusal to engage with Microsoft would likely result in a shareholder rebellion.

Also, as Microsoft went to great lengths to point out, the deal makes great sense strategically:

  • There are now four big global Internet players—Google, Yahoo!, Microsoft, and AOL—and the market will support only three (at most).
  • Yahoo! and Microsoft will be far more competitive with industry leader Google if they combine forces.
  • This is a business that benefits greatly from economies of scale: Combining the two companies will save at least $1 billion on research and development, marketing, administrative, and other costs.
  • The combined company will be a “must-buy” for advertisers, which should improve the company’s revenue growth rate.

The only way Yahoo! will likely be able to fight off Microsoft’s offer will be to solicit offers from another party. Potential “white knights” include Google and AT&T, but for several reasons, I doubt either will emerge as serious contenders. A Microsoft executive told me this morning that AT&T encouraged the Microsoft bid and isn’t interested in making its own play for Yahoo!. And a Google offer would draw too much heat from regulators and customers who already think the company is too powerful. Traditional media conglomerates such as Time Warner and Viacom, meanwhile, just plain can’t afford to spend $45 billion.

Another possible savior is a private-equity firm such as Quadrangle or Silver Lake. Late Friday afternoon, rumors surfaced that a big New York firm was just days away from making its own bid for Yahoo!. Assuming Yahoo! views such a deal as a better alternative, Yahoo! could encourage the firm to go ahead.

Either way, Yahoo!’s days as a stand-alone public company are almost certainly numbered.  With the stock now at $29, up from a paltry $19 last night, Yahoo! shareholders aren’t going to let Yahoo! management say no to Microsoft without a fight. Yahoo!’s management has a fiduciary duty to do the right thing, and—for most shareholders—the right thing is to take Microsoft’s money and run.