Last week I commented on a blog post by Ronald Barusch called Dealpolitik: Yahoo!’s survival plan. In his post Barusch critiques Yahoo! Inc.’s pursuit of different options for the company. Part of his critique reflected on Microsoft’s hostile takeover bid for the company three years ago:
True, with hindsight the Yahoo board made a world-class blunder in turning down the Microsoft $33 per share bid over three years ago. But the board has to make the best of today’s situation.
Whilst I agree with the Barusch central thesis that the company needs a new direction or possibly a new owner, and don’t have any particular sympathy for the board, I don’t think that the argument for new management at Yahoo! should centre around the Microsoft takeover bid.
I explained in my comment to the Barusch article that whilst I didn’t have sympathy for the Yahoo! board, I also didn’t think that the whole picture of the Microsoft deal was reflected in the article. I think that there is a serious argument to be made for the Microsoft deal being a flawed structure, with a distinct possibility of it not a viable deal in the first place. There are two main strands to my thinking:
- First of all the destruction of value meant that many Microsoft shareholders were opposed to the deal, but that doesn’t necessarily mean that it was a bad deal for all Yahoo! shareholders. (Only the ones that initially opposed the deal. Since the Microsoft deal at the time offered cash for the first 50 per cent of shares and Microsoft shares for the last 50 per cent shares. Given the state of Microsoft’s share price over the past decade or so and the state of the Microsoft online services line, cash would be preferable.)
- The second and more important strand is that the deal had a number of antitrust roadblocks to cross. Whilst Microsoft is a bit player in the search engine advertising market, it is already a convicted monopolist in its server and tools business. This important because Yahoo! is not only a media company; but also a key contributor to a number of critical open source projects; having contributed to PHP, the Debian Linux distribution and Hadoop. Given this, the deal would have been exposed to antitrust risk in the EU. A second risk of antitrust would have come from the Japanese and Chinese markets were you have national internet champions in Softbank (majority owner of Yahoo! Japan) and Alibaba trying to escape the clutches of Yahoo! instead being acquired by Microsoft
It was interesting that neither Microsoft, the media or Yahoo! broached the likely antitrust implications publicly at that time. Which I suspect is partly a credit to good execution by Microsoft’s corporate communications team.
The Microsoft bid was a powerful lever that helped Microsoft secure the search deal it wanted with Yahoo!. Though Microsoft has failed to reap the full commercial gains partly because it’s AdCenter technology wasn’t as good as the Yahoo! Panama project it replaced – and neither were as good as Google’s own advertising technology.
What should the Yahoo! board have done, and what should it do next probably has more options in it than football fans arguing over the performance of their team manager and I don’t have the definitive answer.
But I suspect my comment may have been bounced from the Wall Street Journal Online site because it throws a spanner in the works of the Mr Barusch. His nice, neat storyline with the Microsoft deal opportunity as an inciting incident into a downward spiral of a digital greek tragedy. Mr Barusch and his colleagues don’t want the evidence to get in the way of a good story
As an aside, it also shows how powerful storytelling is as a way to game media | public relations in favour of the PR over the journalist. People like stories, they think in stories and it makes it easier to efficiently and effectively file easy copy or blog posts.
So if the Microsoft hostile takeover bid wasn’t the inciting incident what was?
My own personal opinion is that spiral probably goes at least as far back as Yahoo! overpaying for its purchase of Broadcast.com – a business that had some 13.5 million USD in revenue per quarter, acquired for 5.9 billion USD in Yahoo! stock back in 1999. It was a bad deal, and it adversely affected Yahoo!’s approach to strategy, risk-taking, decision-making and speed of execution. This is likely to affected Yahoo!’s thinking on its attempted acquisition of a young Google.
I believe that the damaged approach to strategy was a major factor in Brad Garlinghouse’s famous peanut butter memo from 2006 (though as Techcrunch summised it was also a political power-play and as I mentioned at the time, Garlinghouse was as much to blame in many respects as other senior executives.)
Investor Paul Graham thought that Yahoo! was screwed by cultural traits baked into the organisation’s cultural DNA as far back as 1998:
- Less interested in innovating in advertising, because this would expose customers to the reality that they were overpaying for their inventory.Yahoo! was build on brand advertising driven by reach not by targeted ads so they missed why search advertising (and a good search engine was so important)
- Yahoo! thought of itself as a media company rather than a technology innovator; back then technology companies sold software rather than advertising, so by default they must be a media business
- Fear of Microsoft – whilst Microsoft is a big ugly mean company now, it is nothing compared to the beast it was before the internet became mainstream and the Judge Jackson trial. Graham thought that Yahoo! tried to define itself out of the footprint of Microsoft. All of this meant that Yahoo! wasn’t a Google, Facebook or Twitter-style technical talent magnet