Paul Kedrosky: Analysis of the Microsoft Decision, Plus Yahoo's Hari-Kari

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May 3, 2008

Analysis of the Microsoft Decision, Plus Yahoo's Hari-Kari

Here is my first-cut analysis of what has happened here:

On the friendly front, Yahoo drew a hard line at $37 per share, well above the $33 that Microsoft now says it told Yahoo this week it was willing to go
On the hostile front, Yahoo apparently told Microsoft -- as I surmised and said early on -- that it was prepared to take steps to mess itself up to prevent a hostile acquisition or proxy battle. In particular, Yahoo was prepared to outsource key search terms to Google, which is, in my mind, goofy, mischievous, and unlikely to stand up to regulatory or legal scrutiny.

As a result, when faced with too high of a spread to the acquisition price on a friendly basis, and a company prepared to gut itself, with Google's help, to prevent a hostile action, Microsoft is saying it will walk away.

Now, will it stay away? Good question. Anything can happen in these things, and a lot will depend on what happens to Microsoft and Yahoo stock in the first few days of next week. Yahoo could see a fusillade of lawsuits if its stock falls to the teens, especially given the length it is apparently willing to go to prevent a hostile offer from going through. In other words, we could see Microsoft back again.

Bottom-line for me: This has a been a risky and poorly managed affair from end-to-end. Both CEOs deserve immense blame -- Ballmer for vacillating; Yang for running a public company without the foremost regard for shareholders -- and they are likely to be the two people who suffer the most indignities (including possible termination) over the coming weeks and months.

Other collateral damage: Major shareholders who built up positions in anticipation of this, especially Bill Miller at Legg Mason, who was beginning to see his year turn around after two nasty years of lagging the market. Also a host of M&A arbs, most of whom thought that Microsoft had no choice but to go hostile, and are now going to see even that premium come out of the stock, at least until the legal actions start up.

[Update] The more I think about it, the more Yahoo (and maybe Microsoft too) reminds me of that crack suicide squad in Monty Python's Life of Brian.

OTTO:: Ve are the Judean People's Front. Crack suicide squad. Suicide squad! Attack!; [drum roll]
J.P.F.:: Uh! Ugh. Aggh...
OTTO:: That showed 'em, huh? Oooh.; [whump]
BRIAN:: You silly sods.