Yahoo: Should Microsoft Rebid or Walk Away?

The stock price was up in midday trading, over $12, after closing at $10.63 yesterday (as of this posting, Yahoo share price was $11.35). The only way Microsoft should buy Yahoo—and all of it—is if the stock price is low. Behind the blip rise in share price, Yahoo acquisition makes even more sense today than it did on Oct. 10, when I reversed position on a Microsoft takeover. An acquisition would make even more sense if not for Jerry stepping down as CEO and subsequently driving up Yahoo's share price.

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Over the weekend, I walked into the living room, where my wife watched the movie "Coal Miner's Daughter" on one of the pay movie channels. Patsy Cline song "I Fall to Pieces" played. That verse repeated in my head as I prepared to write this post today. Falling to pieces is exactly what I expect from Yahoo now. I wrote in October: "Yahoo is not even a fire sale. We're talking estate sale now." Microsoft should put itself at the head of the line to get something, either choice parts or the whole estate.

Jerry will be forever blamed for not acquiescing to Microsoft's unsolicited $44.6 billion bid announced on Feb. 1. The deal would have priced Yahoo at $31 a share. They say that hindsight is 20-20, but sometimes it's myopic. In context of the global economic crisis that started in mid-September, a merger would have been as perilous as beneficial to either company. Shareholders would have gotten cash and Microsoft shares, but would Yahoo really have been better off?

It's mainly because of sagging economies that I think a merger now makes sense for Microsoft. That's provided the price is right—and I think $12 a share is the maximum to pay. Less than $12 a share is low enough where Microsoft could buy all of Yahoo for cash and stock, while leaving money in the bank and without going into debt. Why now:

• Startups stopping. The economic crisis has savaged Silicon Valley's once seemingly mighty Web 2.0 startups. Layoffs are everywhere, and some startups have shut down. People will want to use brands they can trust in. Yahoo has got the brands, and Microsoft brings the trust. Economic crisis is sinking startups and lifting up services with trusted brands.
• Goosing Google. Meanwhile, the once mighty Google is no longer as haughty. On Nov. 6, 2007, Google's share price topped $740. Today, the stock is trading around $290. Google's riches are less, and uncertainty remains about how badly recession will sap advertising spending. Suddenly, Google, while still mighty in search, is a vulnerable giant.
• Crimped Competition. The economic crisis makes time for Microsoft to take on a hefty integration project. With competitors decimated and Microsoft's Azure Platform Services finally testing, Yahoo integration is do-able without potential Microsoft market losses.
• Ruckus Restructuring. Companies can bury many sins during a merger. It's not unusual for companies to do layoffs or other activities that might otherwise cause shareholder or Wall Street concerns but which are overlooked during a merger integration.

Yahoo's Brands Are Valuable
Microsoft may look to Yahoo for search share and data centers, but the brands are more valuable in an economic downturn. People won't stop using Web services, but they will be choosier about them. Nobody wants to plunk their personal or business content into a service that could close tomorrow. Yahoo is a globally recognized brand, and one that people will want to trust. As I expressed a few paragraphs back, Microsoft brings that trust. Nobody expects Microsoft to close up shop. Microsoft can pick up millions of new users through a Yahoo acquisition. But the economy will stay bad for only so long; waiting is a risky strategy.

Those brands are online real estate. From them, Microsoft can extend the number of properties for which it sells advertising and provides search. What is Flickr's value as a brand? It's priceless, because of the millions of photos stored there—all of which have personal meaning to the people posting there. Meaning may be intangible, but it's still a sellable commodity. Yahoo has poorly capitalized on Flickr. The Getty Images deal was short-sighted. Yahoo should have worked to make Flickr into a user-driven stock photo site, perhaps using auctions whereby buyers set prices. Should Microsoft only pick off pieces of Yahoo, Flickr should be one of them.

Post-acquisition, branding is tough. Microsoft executives would almost certainly be inclined to subsume Yahoo's brand into Windows Live. But that would be a mistake, methinks. Yahoo is a strong global brand. Microsoft-Yahoo would be better, perhaps, for most—if not all—acquired services. HP offers best abject branding lesson. The Compaq brand continues many years after the acquisition. HP also is a model for buying a competitor with which there is huge market overlap.

Let me emphasize: The Yahoo brand is golden. It's certainly worth $10 or even $11 a share for a brand whose services have global reach and millions of users. Data center infrastructure and search share, Microsoft's earlier reasons for buying Yahoo, would be bonuses now. I objected to Microsoft's original takeover offer. Yahoo wasn't worth $31 a share to Microsoft. But anything less than $12 a share is worthwhile.

Do Microsoft and Yahoo Have the Will to Deal?
The question: Does Microsoft have the will to buy or Yahoo the will to sell? There is no other choice. If there is no deal, Yahoo's destiny is certain: It will fall to pieces. Yahoo services are too valuable for the board to let them whither, particularly with Billionaire business buster Carl Icahn and his cronies sitting on it. Pieces sold separately will gain bigger price than the whole, methinks. But shareholders might not have the stomach to wait; they've got ulcers enough watching the stock fall after $31 a share buyout was so close. A Microsoft offer of $12 a share is valuable, particularly if stock and cash, because Microsoft will do better with the assets—as long as the Yahoo brand is preserved and economic crisis continues laying smaller Web 2.0 startups to waste.

Microsoft's will to buy isn't as strong as it once was. For starters, Kevin Johnson, former president of Microsoft's Platform & Services division, has left the company. Kevin was one of the original acquisition's principal architects. But there's still some will left, just Microsoft executives deny it. How can they not? The slightest hint of acquisition drives up Yahoo's share price. Microsoft's best strategy is doing and saying nothing—waiting for the share price to fall low enough that even a lowball bid would be welcome.

Also, Microsoft executives were never united on the acquisition. It was my belief in February, that a small portion of Microsoft executives pushed hard for the acquisition, believing that Yahoo would be the springboard to better competing with Google. A much larger portion approved of the acquisition attempt, but with a different objective—pushing Yahoo the hell out of the way. The global economic crisis has put tinted glasses on Microsoft executives trying to look back with 20-20 hindsight vision. What they see is share price—that with stocks falling everywhere Microsoft would have grossly overpaid for Yahoo. But they miss something: Microsoft would have passed through the most difficult parts of integrating the two companies just as Web 2.0 competitors either retreat or die—and that includes Google. Microsoft would be ready to kick ass online.

As Yahoo searches for a new CEO, potential candidates begin to surface. Yesterday, All Things Digital's Kara Swisher suggested Kevin Johnson. It's clear that Kevin wanted to run Yahoo by acquisition. But would he run it back to Microsoft?

Microsoft and Yahoo must reach a deal soon, or they may never will. Negotiations must be silent. No leaks. Yahoo's board must understand that they are a country without borders and trade routes are cut off. Anybody and everybody will invade Yahoo territory. Either the country surrenders as a whole or gives up land here and there. Yahoo won't get anything close to $31 a share from Microsoft. Not even $15. Leaks can only hurt realistic negotiations from leading to a merger.

As for Microsoft, you made this mess. Now clean it up. Yahoo is weaker because of the failed hostile takeover attempt. But it's still in the way to Google, because Yahoo brands remain vital and valuable. Microsoft, you should worry that Google will pay more. U.S. regulators and trustbusters would never let Google buy Yahoo. But Google could buy up pieces of Yahoo or pay to replace Yahoo services with those from Google. It's not a question of if or what, but when and to whom.

What do you think Microsoft should do? Please answer in comments or by e-mail.

[Please send your tips or rumors to watchtips at live.com].

Related Posts:

• Yahoo's Yang Steps Down, Leaving Microsoft, Google to Gobble Share, Google Watch, Nov. 17, 2008
• The Google Monopoly Expands, Microsoft Watch, Nov. 11, 2008
• What the Economic Crisis Means to Microsoft, Microsoft Watch, Oct. 26, 2008
• Should Microsoft Buy Yahoo Now?, Microsoft Watch, Oct. 10, 2008
• Why Microsoft Walked Away from Yahoo, Microsoft Watch, July 24, 2008
• Yahoo's Response to Carl Icahn, Microsoft Watch, July 7, 2008
• With or Without Yahoo, Microsoft Watch, June 25, 2008
• Don't Yell 'Yahoo' So Fast, Microsoft Watch, June 25, 2008
• Microsoft and the Yahoo Lobotomy, Microsoft Watch, May 19, 2008
• Icahn Yahoo Better than You, Microsoft Watch, May 15, 2008
• Yahoo: Between a Rock and a Hard Place, Microsoft Watch, May 8, 2008
• Why Didn't Microsoft Yell 'Yahoo'?, Microsoft Watch, May 5, 2008
• Microsoft Boo-Hoos Yahoo, Microsoft Watch, May 3, 2008
• Open Letter to Steve Ballmer, Microsoft Watch, May 1, 2008