By now you must all have heard the news of Microsoft is buying Yahoo for $44.6B (or 42B depending on the math). There also has been a huge number of news item on potential competing bids, Y trying to rebuff MS, and Google trying to play the white-knight/spoiler.
Weeeell, they say M&A is a bear knuckle sport. If so, Balmer and MS must have hired couple of awesome heavy weights. MS's purchase of Yahoo, right after paying FaceBook (FB) a small sum to get exclusive advertising rights is quite brilliant. For one the timing is perfect. Yahoo! is in relative chaos, with lay offs, drop in stock values and further potential down turn in the economy. So why pay a 50% additional margin, and not wait to scoop up Yahoo (Y) at a cheaper valuation. May be to discourage, news crop, IAC, Time Warner or other potential bidders, but my bet is that there is more to this.
First of all, bottom fishing is all fine and well, if there is something left to fish for.
MS is cash rich (even if it has to borrow money after its stock buy back). It also needs the "right" user base and Ad platform that Y can provide, and Y can certainly do with some cash. Then there is the technology, the IP, the brand, a greater silicon valley presence and... well something that is not Microsoft!
Moreover, Yahoo's last couple of purchases (one of a push mobile advertiser) all at $150M a piece has come under scrutiny by analysts. This does not bode well for Y's M&A group, usually referred to as the shark tank! It also signals another timing opportunity. Balmer going to the board directly shows that MS is serious, and it shows tactic often used by LBO's. A quick purchase also gives the MS management time to turn Yahoo around and do some transfusion that seems necessary for things to move forward.
Sure, MS could have offered $44B or even $40B and haggled. But when you are paying $15B for Facebook -- however small a portion -- few billions between friends is not much, specially if it greases the wheels and reduce the bleeding of talent from a potential acquisition :-) Even in this environment with though resell for corp loans, MS should be getting a good leverage rate to purchase Yahoo.
So what may be the pitfalls and who is hurt by this merger.
Despite http://www.nytimes.com/aponline/technology/AP-Microsoft-Yahoo-Clash.html?scp=3&sq=microsoft+yahoo&st=nyt and similarity of cafeteria meals (!!!) the pitfalls are the usual cultural issues that arise during any merger. Given what has been happening at Yahoo, the traditional competitiveness at MS, this may not be a small mine field to cross. MS has a fairly strong culture of its own, and Yahoo!, well it must be getting better.
My favorite discussion last week was with a very seasoned HR director. As soon I found out about her background I asked: "Bev what do you think is the main source of the 'right' company culture". McKinsey has been writing a lot about this lately. Her immediate response: ' It all flows down from the management at the top :-).'
As for who is most hurt by this deal? I'd say, Facebook not Google. MS paid FB the least amount of money it could to secure its advertising rights. Yes it may be a 72% female, mostly chatty teenage girls, with little or no buying power -- i.e., one of the list desirable of demographics. But the $216M(?) was a very cheap admission price for MS. Compare the billion dollar deal that the M&A team at Google paid for the similar rights to MySpace Ads :-) FB got a small but badly needed validation of its $15B valuation, and MS walked away with a sizable market, needing a good ad provider --
such as, Yahoo! -- to supply the Ad contents. Talk about synergy, specially now that Y owns Blue Lithium.
FB, on the other hand, now has to justify being worth 1/3 of Yahoo's capitalization. Not easy when you got $150M Rev and negative profits... The upside is that they project doubling of Revs to 300M for 2008, but even then a multiple of 50 on Rev (not even cash flow) specially on a projection, with a lot of talk about how FB advertisers are not getting their money's worth... ehmmmmm ... weeeeell stranger IPO's were made around 2000 (see WebVan).
As for Google, I wrote about something fishy about its historical US Revs versus the TAM for all ecommerce http://www.goecart.com/ecommerce_solutions_facts.asp. in 2005. I said that this is particularly serious when you consider that most of those online transactions happen directly on the aggregator sites such as Shopzilla and Amazon, and nothing has changed since. But, big G has been getting a lot more of its revs from the ever growing overseas (something like 47% for 2007). After all, G does what it does well :-) Yahoo on the other hand has been looking to sell overseas assets such as Kelkoo !!! http://www.techcrunch.com/2007/10/02/yahoo-may-sell-kelkoo/. As for the SaS market, Google and writely may have been making some headway, but they are not taking the office market by a storm.
This is a legitimate concern for G's CEO to have. But Yahoo could also buy Zoho and things could be as bad, if not worst.
As for the general M&A market (specially the Silicon Valley VC's), it is probably not great news :-( Even when it was really cash rich, Microsoft was traditionally investment conscious (if not timid) and quite smart in where it hedged its bets. Yahoo on the other hand was a good source of M&A deal flow, and merging two of the top three start-up buyers reduces the entrepreneurs' and VC's options of an exit.
On the positive side, this give some sense to the valuation scene http://www.techcrunch.com/2008/01/18/slide-gets-their-huge-valuation-and-raises-50-million/.
US and European regulators? 95% chance the US regulators won't care, but the EU's will. They always do!
In summary :-) the Yahoo deal is good for Microsoft, bad for Facebook, probably not as important to Google in the long run, good for the general valuation scene.
Cheers for now, E
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