Microsoft might be the software company that everyone loves to hate, and Steve Ballmer might be
But Microsoft and Ballmer proved two things by deciding to walk away from an acquisition of Yahoo this past weekend – they are not desperate and they are not stupid.
Talks between Microsoft and Yahoo apparently fell apart after Yahoo refused to accept an increased offer of $33/share, insisting on $37/share.
Microsoft’s higher offer represented an additional $5b for Yahoo shareholders and reflected a greater than 70% premium to Yahoo’s stock price on January 31, the day before Microsoft launched its bid.
In a letter from Ballmer to Yahoo CEO Jerry Yang, Ballmer thanked Yang for taking the opportunity to explore the acquisition and reiterated his belief…
…”that a combination of our two companies would have created real value for our respective shareholders and would have provided consumers, publishers, and advertisers with greater innovation and choice in the marketplace.“
He went on to note that while Microsoft could have taken its offer directly to Yahoo shareholders, it realized that doing so was not in the best interests of either company, especially in light of Yahoo’s widely-publicized plans to outsource some of its search advertising business to Google, ostensibly in part to make a hostile takeover attempt less appealing to Microsoft.
Ballmer noted that such a move would
- “Fundamentally undermine Yahoo!’s own strategy and long-term viability“.
- “Raise a host of regulatory and legal problems that no acquirer, including Microsoft, would want to inherit“.
- “Effectively enable Google to set the prices for key search terms on both their and your search platforms and, in the process, raise prices charged to advertisers on Yahoo“.
- “Foreclose any chance of a combination with any other search provider that is not already relying on Google’s search services“.
In my opinion, this highlights the fact that Yahoo’s approach to Microsoft’s bid came from less-than-intelligent strategic planning and was the business equivalent of threatening to cut off the nose to spite the face.
As I noted in my most recent episode of The Web Week in Review, the enemy of your enemy is rarely your friend, and in Yahoo’s case, Microsoft quite correctly observed that teaming up with Google was detrimental to Yahoo’s interests, and thus its own as a potential acquirer.
One of the lawsuits already filed when Yahoo appeared to be refusing to negotiate with Microsoft also noted that Yahoo was destroying shareholder value by seeking deals that essentially made no sense, stating that:
“The Yahoo board, in its desperation to pull off a ‘Just say no to Microsoft’ defense, is fighting off a non-coercive 62% premium offer by pursuing all manner of value-destructive third party deals.“
Ballmer’s words, including his statements that “I still believe even today that our offer remains the only alternative put forward that provides your stockholders full and fair value for their shares” and “by failing to reach an agreement with us, you and your stockholders have left significant value on the table” will probably provide ammunition for the onslaught of new shareholder lawsuits that are certain to be filed.
And filed they should be.
In my opinion, accepting Microsoft’s offer was in the best interests of Yahoo’s shareholders who had seen the value of the company eroded over the years due to poor leadership, an identity crisis and the rise of a more innovative Google.
Instead of taking the money and running however, Yahoo’s board of directors chose to take actions that I think can reasonably be argued to be self-serving and contrary to the interests Yahoo’s shareholders – the people and entities they are supposed to represent.
While it is one thing to reject an acquisition offer and to take actions designed to defend against a hostile takeover, I believe that the actions of Yahoo’s board went beyond what was appropriate.
Contrary to Yahoo’s response that it remains “focused on maximizing shareholder value and pursuing strategic opportunities that position Yahoo! for success and leadership in its markets,” many feel can Yahoo can never recapture its past glory and at the very least, there is little indication that Yahoo is, in the foreseeable future, going to make any significant progress towards revitalizing its business.
While Yahoo is far from a company on its deathbed, the decline in shareholder value over the years cannot be ignored. The company faces some significant challenges that it has thus far been unable to solve.
As such, merely thinking about running into the arms of its biggest competitor to avoid accepting a buyout offer that gives shareholders a more than 70% premium is not only extremely foolish, but also casts doubts on the agenda of the Yahoo board and whether the board is fulfilling its fiduciary duty to Yahoo shareholders.
Being a Yahoo board member is a lucrative position. In 2006, Yahoo directors earned between $588,424 to $649,788. A February 2008 lawsuit dealing with a Microsoft acquisition offer that was reportedly made in 2007 claims that Yahoo’s board of directors failed to act because they did not want to lose their compensation packages.
Whatever the case may be, it’s hard to justify the notion of a company teaming up with the competitor that has played a significant role in its decline while rejecting an opportunity to earn a significant premium for shareholders by teaming up with a company that is looking to better compete with the same competitor.
Now that the drama between Yahoo and its suitor Microsoft is eliminated and the “distraction of Microsoft’s unsolicited proposal” no longer plagues Yahoo, the drama between Yahoo and its shareholders is just beginning and it could be even more intense.
Was Yahoo playing a game of hardball that went too far or did it intentionally seek to make a deal unjustifiable for Microsoft? Were Yahoo’s directors truly attempting to make a deal happen or were they simply going through the motions?
The answers to these questions may have a very profound impact on Yahoo’s future.
Perhaps the greatest irony is to be found in this situation is the possibility that Jerry Yang, the Yahoo co-founder who helped lead it to the promised land in its formative days, could be remembered as the man who presided over a decision that relegates the company to, at best, a second fiddle position in the market it once led.