How Yahoo might get awayFebruary 7, 2008: 3:00 AM ET
Microsoft's $40 billion bid would be hard to refuse, but there are escape routes.
Since Microsoft bid more than $40 billion for Yahoo last week, the Internet pioneer's future has been very much up in the air. Many observers seem to think Microsoft will win its prize, given the truckload of cash it's offering -- but others aren't so sure. In fact, there are ways that Yahoo might get away.
a) Find a white knight willing to top Microsoft's bid.
b) Outsource search to Google; or
c) Break off bits of the company to boost the stock price.
None of these options looks like a strong possibility. Here's why.
For those who like the idea of Yahoo controlling its destiny, there's a certain appeal to the white knight scenario -- at least Yahoo gets to pick its suitor rather than submit to a shotgun wedding. But the problem here is that Yahoo's carries an expensive dowry, and the companies that can afford it probably won't pay.
Traditional media companies like Time Warner (TWX) or Disney (DIS) would be a natural fit, but they can't afford Yahoo. Many of them already have plenty of debt, a paucity of cash, and the legacy of the AOL/Time Warner deal to remind them (and investors) how badly these old media-new media deals can go. The one company that might have had the credibility to make such a bid is News Corp. (NWS), but CEO Rupert Murdoch has already ruled that out.
Then there are the tech companies like Hewlett-Packard (HPQ), Cisco (CSCO) and Apple (AAPL), which, like Microsoft, could possibly afford to acquire Yahoo with a combination of cash, debt and stock. But why would they? Buying Yahoo means taking on Google, and that's something most big Silicon Valley companies would just as soon avoid. Just look at Apple -- Google's maps are among the most popular pieces of software on the iPhone, and Steve Jobs has said his engineers love working with Google. Why mess with a good thing?
And what about the idea that a sovereign wealth fund could get into the mix? Overseas investors have been on a spending spree lately, taking advantage of the plummeting dollar. Last May, China's fund put $3 billion into Blackstone Group (BX); in November Abu Dhabi put $622 million into Advanced Micro Devices (AMD) and $7.5 billion into Citigroup (C). But those numbers are still far short of Microsoft's $40 billion offer.
Inking a search deal with Google would be another way for Yahoo to potentially evade Microsoft. "We believe the probability of this (25%) is greater than financial markets realize," Citigroup analyst Mark Mahaney wrote in a research note. He said the move could boost Yahoo's cash flow by as much as 25 percent -- a move that would certainly cheer shareholders.
Strategically, though, such a deal with Google could marginalize Yahoo, making it more of a media company than a technology company. Yahoo management has worked to avoid that fate over the past few years, making clear that their goal was to take on Google in search and even spread its own search technology to other sites such as WebMD (WBMD). Outsourcing search ads would also hurt Yahoo's display ad business, which competes directly with Google. Without a search ad business, Yahoo could no longer claim to be a one-stop shop for online advertising.
Which is a reason why it might not make sense for Yahoo to break itself up and sell off some of the pieces, another strategy some have suggested to keep the company independent. Unlike Microsoft, which is a collection of mostly separate businesses that make Windows, Office, Xbox and MSN, Yahoo has one core business: selling ads on Yahoo search and content pages. That doesn't leave much room for spinoffs.
"I can't see them breaking out their assets -- I don't think that would make any sense," said John Byrne, analyst with Technology Business Research. "One breakup scenario would be to have them sell off their content sites -- news, sports, e-mail, IM etc. and keep their ad platform. But in order to have a workable ad platform, you need to have content sites on which to place ads." Of course, that would also mean abandoning the freewheeling online culture that has long defined the company.
Some pieces would be easier to break off. Yahoo Japan, in which Yahoo has a 33 percent stake, is up nearly 10 percent on news of Microsoft's takeover bid -- a Sanford Bernstein analyst says selling that and its stake in Chinese search engine Alibaba could net nearly $18 billion. But beyond that, it's tough to see what Yahoo could auction off that would unlock shareholder value.
In the end, Yahoo's most effective evasive maneuver might be to drag the process out as long as possible. Why? Microsoft's stock has dropped more than 10 percent since it announced its hostile bid -- a development that both decreases the value of its offer and irks any Microsoft shareholders who are skeptical of the deal. That's why you can be sure that Microsoft won't give Yahoo board members long to ponder their escape options before the software giant moves to take the deal directly to Yahoo shareholders.
Michal Lev-Ram contributed to this report