Why Microsoft hasn’t gone hostile

Yahoo is smoking something crazy if they think that $33 undervalues the company. Their PPC engine is awful (as a CMO, I spend several $million per year on search ads, with 95% going to Google, 4% to Yahoo and 1% to Google). They do not have many truly ’sticky’ properties (even Yahoo Mail is not so great now that most consumers keep multiple email accounts). Also, their business model has been superseded by extensible walled-garden platforms, like Facebook. Yang has done a GROSS misservice to stockholders and deserves every class action suit that comes his way. In truth, I think that this is a clever ploy by Ballmer, though. Ignite a civil war within Yahoo and watch them come crawling back…

My view is that Yahoo is akin to hardware and brick and it has not been able to create something exciting. It is the information that it has that can be structured to something of value.The more they delay in going over to some party which may give it life, the worst it is. I find Yahoo having more info that Google on any matter and therefore it is still time to take advantage of it and move to microsoft as its saviour

Yahoo’s search advertising continues to have MAJOR click fraud problems (bad 3rd party affiliates). Ask any any serious advertiser, and they’ll tell you how they intentionally bid LOW on keywords to avoid all the fake clicks. The PPC message boards have been raving about this for years, but Yahoo does nothing (because they make money on all the click fraud). Google at least lets you turn 3rd party affiliates off, Yahoo refuses. I spend about $300 a day on Google, and about $8 a day on Yahoo. Most serious advertisers do exactly the same thing. The math is simple.

Yahoo is going nowhere but down. A Microsoft buyout would be a God-send for advertisers. A Google buyout would be a God-send for advertisers. In fact, ANYTHING would be a God-send compared to the way Yahoo currently handles it’s search advertising.

Yahoo comeback? Don’t kid yourself. The only options I see for Yahoo is to merge or go gradually bankrupt.

To begin to reform the rating industry, we believe some industry misconceptions need to be addressed:

Viability of investor-supported model - the issuer-supported rating firms used a subscription based model from the early 1900’s to the early 1970’s which was a substantially longer period than the issuer-supported period. Given the large number of new business calls Egan-Jones is receiving, there is growing demand for a business model where the rating agencies and investors have an alignment of interests. (Egan-Jones has been in business for 16 years.)

Problems are limited to the Structured Finance area - the recent credit failures/breakdowns of New Century, Countrywide, the monolines, Delphi, the home builders, and Bear Stearns were outside of structured finance; the key issue is that inflated ratings facilitated the unsustainable growth and resulting collapse of credit quality. See also Enron and WorldCom as failures of corporate debt obligations.

Issuer-supported Rating Firms distribute their ratings for free to the market - fund managers such as Fidelity pay over $500,000 per year to obtain electronic feeds and additional commentary on their ratings.

The SEC can issue ratings - on March 11th the chairman of the SEC assured the market that Bear had “a good deal of comfort on Bear’s capital” and yet Bear effectively failed four days later. The SEC’s core role appears to be calming the markets rather than issuing timely, accurate ratings.

Higher “Chinese Walls” will do the trick - where there is a will, there is a way. The April 11th WSJ article regarding Moody’s Clarkson firing rating officers for failing to maintain market share is an indication of the core conflicts. The current situation of an incentive for issuing high ratings and no penalty for inflated ratings (because of the freedom of speech defense) is likely to result in serial failures.

More rating firms will “open” the market - the growth of Fitch as a viable competitor to S&P and Moody’s has not resulted in more timely, accurate ratings. Arthur Levitt’s concern about rating inflation appears to be well-placed.

“They lied to us” - some of the issuer-supported rating firms contend that their failure to issue timely, accurate rating was the result of false information provided by issuers. The issuers have an incentive to skew their information and if the rating firms have no recourse for ascertaining the truth, they will not.

Separate consulting from rating - from a practical standpoint, it is impossible to separate the two; the consulting business is not really a significant and separate business for the major rating agencies. Furthermore, it is extremely difficult to ascertain when a rating firm is simply responding to investment banker questions or structuring securities.
Investor-supported rating firms have conflicts – investor-supported rating firms normally do not know whether investors are long or short and are normally motivated by issuing timely, accurate ratings.

“Investors are at fault” - there is a natural limit on the amount of due diligence most investors can easily perform; a chief investment officer of a non-domestic insurance firm is unable to get the depth of information some of the rating are able to obtain. There is a natural need for reliance on credible agents. A person going to a doctor should be able to assume that the doctor will do his or her best to properly treat that person. Likewise, investors should be able to assume that a rating firm will use reasonable effort to issue timely, accurate credit ratings.

The core issue is the alignment of investor and rating firm interest.

Another key reason a hostile takeover is a bad idea is that it will create enough bad blood to send a large number of Yahoo employees packing - something with which Microsoft should be concerned regardless of the method of acquisition.

Venkatraman,

There would still be value, although admittedly not as much and Microsoft would never publicly admit it, in eliminating a current and future competitor for the online search and advertising market and even if value was destroyed it would still not accrue to their primary competitor in those markets which is Google. The acquisition of Yahoo by Microsoft will bring value to Microsoft in almost any case, provided that they do not grossly overpay, so it is really only a question of how much value and how much it will cost them to acquire it.

I agree Yahoo is better off with out Microsoft. Microsoft should put more effort into fixing their so called Vista operating system.It sucks.

BATO - Don’t know what crack you’re smoking, but you might want to hold onto it for a while. Major comeback? Yahoo? Pulease…

Hostile takeover simply does not make sense. And, Yahoo is not worth more than what has been already offered.

Microsoft should completely drop the bid. After a year or two may be they can try again. May be at a discount.

Learn from Larry Ellison.

I enjoy using lots of Yahoo’s services like mail, news, sports, and fantasy football. I think Google’s search is cleaner and better currently. I don’t think though that Yahoo is worth terribly more than the $33 offer though, probably not $36 a share. There is no evidence currently to show their profits are really worth it. In the long run a combined MS - Yahoo would still seem to be behind Google in terms of search and future web innovation, which seems to be the point of MS acquiring Yahoo in the first place.

If Microsoft took its marbles and went home (walks away from the deal) it seems to me that Yahoo stock would plummet and management would have some serious fiduciary liability to the stockholders. Not a position I would want to be in if I were them.

I agree with your assessments. Moreover, hostile takeover when people are the key resources does not make business sense. Post-merger integration is a thorny issue in most mergers and winning Yahoo through proxy battles (and paying a premium) will only put more pressure on Microsoft to create value from the merger–which may be more elusive than not.

Very Good calculation if everything is going tobe based on math alone.There’s also the element of PRIDE and EGO that has to be consideredin this equation!! Nevertheless, I hope A lot of investors and yhoo followers alike to realize that this company is on the verge of major COME BACK! Mr. Yang and Company will have the last laugh and say I TOLD YOU SO…