In My Words… by Fred Neil

Once a darling of Wall Street and Silicon Valley, is Yahoo! the latest of wanna be Good To Great casualties. As Jerry Yang and the Y! Board respond back to Microsoft with a “thanks, but no thanks” reply because the “price” was too low, what happened with the denominator of the P/E ratio… The current Y! bloated P/E of 63.5, compared with an industry average of 44, sector average of 24 and S&P average of 18.5, it seems to me that it is less about price and more about earnings. What is Y! doing to return value to its shareholders, has it lost its way. Has it tried to become all things to all people, making it a bloated company without a vision or mission. As the #1 trafficked site on the web today, how has Y! not figured out how to better monetize its assets. Should one call into question the assets Y! has built. I subscribe to the adage of quality over quantity. It should be less about all the things Y! is doing, or has tried to do, but more about the quality of its execution. At best, I give Y! a C- in execution.

I love the brand and I love what they are capable of doing, but they just are not getting it done. How has Google been able to eat their lunch over the past 5 years, stealing significant share and seemingly making more strategic acquisitions, and most importantly better monetizing the assets of their acquisitions. I submit, however, that Google is not immune to the problems of Y!, they are just not as old. They too must not lose sight of who they are and they too must be sure to be strategic in their future strategy and business direction. For both Y! and Google, it is not all about a land grab of who can acquire more and spend the most, but who can make the right, or best, investments based on fit, scale and future value. Once acquired, who will succeed best at integrating and maximizing the enterprise value of their conquest. To date, the scorecard seems to heavily favor Google. They have been more aggressive, more opportunistic, seemingly had a better and bigger vision and stayed closer to their core.

But what of Y! and Microsoft. Will Microsoft go hostile, does Microsoft win if it goes hostile. A fellow Facebooker, Jason Goldberg, made the following thoughtful post yesterday which raises several valid questions in that regard.

An excerpt from Jason’s post:

I’m sure that there are many rounds of this to still be played out.

Having lived through the aftermath of the AOL-Time Warner merger as a manager who was charged with helping integrate the companies post merger, here are my top reasons as to why I think this deal should not happen.

1. Microsoft is going to F*ck it up. See reasons 2 - 8.
   
2. Microsoft does not have any sort of merger integration of this scale in its DNA. Microsoft likes to build not buy. Sure, Microsoft has done some small acquisitions in the past, but most of them were to acquire talent or a technology, nothing of this scale. Only the aQuantive acquisition comes anywhere close but that was a small small fraction of a buy compared with this.
3. Integrate aQuantive and Yahoo at the same time? No way.
   
4. Microsoft is in Seattle and Yahoo is in Silicon Valley. Microsoft is very much a Redmond or bust sort of company. Yahoo will be the bastard step-child in a post merger world.
5. Top Yahoo talent are going to flee immediately and Yahoo innovation will be stifled.
   
6. Microsoft does not have consumer Internet in its DNA. Microsoft is a software company, not a web company.
   
7. Microsoft is an arrogant company. Managers at Microsoft are not going to mesh well with the team at Yahoo, especially when the mother ship is telling the silicon valley office what to do.
8. This was a hostile takeover! For Microsoft and Yahoo to work, they would need the teams to be jazzed up and excited to make it work. I don’t see how that happens with a hostile takeover as it will always be Microsoft in charge.

The question of whether Microsoft can pull this off is valid. Certainly Microsoft has the cash to get the deal done and can easily up its bid and likely win a hostile bid, but is that winning. Can Microsoft and Yahoo co-exist, can they team up to beat, or at a minimum grab significant share back from Google. I applaud the very bold move of Microsoft, which Michael Arrington hypothesized less than one week before the announcement, however the very relevant observations of Jason Goldberg cannot be ignored. It is not likely that Google will become a White Knight and the discussions of a deal between Y! and AOL make no sense, so what will it be. Y! as we know them today will be no more, they have been outed and must do something, either by choice of by force. Kevin Johnson of Microsoft seems to be the mastermind behind the notion of MSFT bidding to acquire Y! to bolster its position against Google. With all that is on Kevin’s plate, does he have the horses, and the leadership support, to not only get the deal done, but the ability to make it work. Only time will tell and it should be a fun ride. I am anxious to see how the landscape shakes out and if the shareholders of the ultimate acquiring and acquired company(s) win.

At this point, I think something needs to and will happen, however I am concerned of the stakes, including acquisition cost, resulting enterprise value, integration and monetization, morale and shareholder value. This is certain to play out over the coming months, but I am not seeing anyone else raising their hand to make a bid, perhaps others think that if they add some of their ingredients to the current Y! secret sauce they will make it worse and not better.