The Big Picture

What Is Yahoo Actually Worth, Part II ?

Tuesday, May 13, 2008 | 03:30 PM

A few weekends ago, I asked the following questions:

- What are Yahoo (YHOO) shares actually worth? Both now, and 3-5 years from now?
- When Yahoo's stock gets whacked due to Mr. Softee's walkaway, does this create an opportunity?Indeed, if Microsoft (MSFT) believed Yahoo was worth $33, wouldn't that imply the company has a value above the January 31 pre-bid price of $19 ?
- The key is whether there are any other bidders lurking put there.

Well, via CNBC, the latest rumor broke today about another bidder-- Carl Icahn -- as much as 50 million shares. Its helped rallied the markets nicely off the lows (other than that, there's not a whole lot else going on)

Paul is having none of it, and instead suggests a Yahoo-Build-A-Rumor sort of thing . . .

UPDATE: March 13, 2008 4:54pm

WSJ is now reporting this as true: Icahn Enters Microsoft-Yahoo Fray:

Billionaire investor Carl Icahn has amassed a stake in Yahoo Inc. and is leaning toward launching a proxy contest to unseat at least part of Yahoo's board, according to one person familiar with the situation.

Mr. Icahn bought roughly 50 million Yahoo shares since Microsoft Corp. on May 3 withdrew its unsolicited offer to buy Yahoo, the person said. Mr. Icahn is expected to decide Wednesday whether to launch a proxy contest -- a Yahoo deadline for board nominations looms Thursday -- and he currently has no assurances from Microsoft it would reconsider a Yahoo purchase. The person said that Mr. Icahn was unsure whether he would nominate a full or partial slate of candidates to try to replace Yahoo's 10-person board. A shareholder vote on any such nominees would take place at Yahoo's annual shareholder meeting on July 3.

Previously:
What Is Yahoo Actually Worth ? (May 4, 2008)
http://bigpicture.typepad.com/comments/2008/05/what-is-yahoo-a.html

Was a Private Equity Bid for Yahoo Thwarted by Microsoft ? (February 11, 2008)
http://bigpicture.typepad.com/comments/2008/02/private-equity.html

Good Morning

Monday, May 05, 2008 | 09:45 AM

in M&A | Weblogs

I don't know why, but Wylie Gustafson's audio tag for Yahoo! has always amused me:

YAHOO_YODEL.aif

See this for more on the Yahoo yodel's history

Huge Project in the Works!

Sunday, May 04, 2008 | 04:15 PM

in Corporate Management | M&A | Politics | Psychology/Sentiment

I have been out of pocket a lot this week at meetings -- I just inked the deal on a huge new project. Details will be forthcoming soon, but I am very jazzed about it.

Hint: It involves Bear Stearns . . .

What Is Yahoo Actually Worth ?

Sunday, May 04, 2008 | 09:50 AM

in Corporate Management | M&A | Valuation

Here's a question worth pondering: What is Yahoo (YHOO) actually worth per share, both today and 3-5 years from now?

I expect Yahoo's stock will get nicely whacked tomorrow. Does this create an opportunity?

There are many ways to answer this question. The traditional balance sheet approach is so well covered, let me suggest something else. Its worth, at least from an M&A perspective, what someone else is willing to pay.

Microsoft (MSFT) believed Yahoo was worth $33, at least as a part of Microsoft. Wouldn't that imply the company has a value above the January 31 pre-bid price of $19 ?

Short answer: Maybe.

The key is whether there are any other bidders lurking put there.

Consider another high profile deal that failed to go through: GE's attempted takeover of Honewell (HON) back in 2001. You may recall that HON was in merger talks with United Technologies (UTX) when Jack Welch offered $55.39 a share, which topped the UTX' bid.

When the deal fell apart -- rejected by EC anti-trust rules -- the acquisition target dropped to the low $30s. By the market lows in fall 2002, it even kissed $20. Over the past 6 years, HON has gained better than 300%. I have been bullish on HON for quite some time, buying after the deal fell apart and holding on for many years; However, I recently sold out of a long held position in HON.

There are some similarities between GE/HON and MSFT/YHOO -- and one crucial difference: Another bidder. In the GE/HON deal, there was also another bidder -- United Technologies. I am less certain a friendly 3rd party bidder will show up to woo Yahoo!

>
Your thoughts?

Fed Opens Yahoo Lending Facility (YLF)

Sunday, May 04, 2008 | 07:06 AM

in Corporate Management | Federal Reserve | M&A | Web/Tech

When the Microsoft-Yahoo news came out last night, I suggested that "the Fed ought to kick in the additional $8 billion or so to make this happen."

Someone on the the Yahoo message boards of YHOO itself took the idea a step further:

"In response to recent events Federal Reserve Board voted unanimously to authorize the Federal Reserve Bank of New York to create Yahoo Lending Facility (YLF) to avoid significant stock market distruption and to support Yahoo! Inc shares. Yahoo! Inc and its authorized agents will be able to borrow from the facility to support stock price.

This facility will be available for business on Monday, May 5. It will be in place for at least six months and may be extended as conditions warrant. The interest rate charged on the credit will be the same as the primary credit rate, or discount rate, at the Federal Reserve Bank of New York.

In addition, Yahoo! Inc shareholders who are unable to sell their shares at or above Friday, May 2 closing price, will be able to swap Yahoo! shares for the US Treasuries at the set price of $29.70 per share."

Fed opens Yahoo Lending Facility 3-May-08 11:58 pm

Hat tip: John Borchers

Previously:
Ballmer, Yang Agree to See Other People http://bigpicture.typepad.com/comments/2008/05/ballmer-yang-ag.html

Ballmer, Yang Agree to See Other People

Saturday, May 03, 2008 | 10:07 PM

in Corporate Management | Federal Reserve | M&A

Its not you, its me . . .

Is that it? After all that sturm und drang, the chase ends like this? Microsoft sweetened its offer to $33, knowing full well that Yahoo was going to stand firm at $37 a share, and reject the sweetened bid. Hence, Ballmer got his face saving way to walk without further humiliation.

Why am I not surprised? Two of the least sexy internet names end not with a bang but a thud. Could we have seen at last the end of the dinosaur mating dance?

My friend Paul at Infectious Greed observes:

"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."

Not a bad sentiment, but I doubt either board has the stones to fire their execs.

I have an idea for everybody involved: Why doesn't the Fed kick in the additional $8 billion or so to make this happen? I mean, isn't that the role of the central bank?

Source:
Microsoft Withdraws Its Bid for Yahoo
MIGUEL HELFT and ANDREW ROSS SORKIN
NYT, May 4, 2008
http://www.nytimes.com/2008/05/04/technology/04soft.html

Microsoft withdraws offer for Yahoo
Anupreeta Das
Yahoo Finance, 26 minutes ago
http://news.yahoo.com/s/nm/20080504/bs_nm/microsoft_yahoo_dc_12

Defending Bernanke

Wednesday, April 30, 2008 | 07:57 PM

in Commodities | Federal Reserve | Inflation | M&A

Randall Forsyth does a good job explaining what FOMC Chair Ben Bernanke has done right:

"Yet much of the criticism seems unfair and after the fact. Not only have Bernanke's unorthodox moves staved off a full-fledged financial meltdown, but they also have done so while reducing the inflation risks inherent in the traditional policy response of merely slashing interest rates.

That's not my opinion. It is the one rendered by the currency, credit, Treasury, equity and gold markets. Since the credit crisis peaked (or reached its nadir, depending on your point of view) on St. Patrick's Day, the Monday after the Sunday night special with the Bear takeover by JPMorgan Chase, the extreme tensions in all those markets have eased.

It was not just the Bear deal per se. The Fed established the Primary Dealer Credit Facility, which let Wall Street investment firms to borrow from the central bank, a privilege reserved for commercial banks, except for the rarest instances in the Great Depression.

The PDCF joined other, new Fed instruments to funnel liquidity where it was needed most. Last December, the central bank began the Term Auction Facility, or TAF, which permitted banks to borrow anonymously for longer periods than via the traditional discount window borrowings, which were to cover overnight shortfalls. TAF also permitted borrowing against lesser-quality but still prime collateral.

The Fed also established the Term Securities Lending Facility, which allowed banks and dealers to swap their illiquid but high-quality government and mortgage-backed securities for Treasuries. It was like a pawnshop for the financial system, allowing Wall Street to exchange their (real, not fake) Rolexes for good-as-cash obligations of Uncle Sam."

What say ye? How much of the benefit of the doubt do you want to give Ben Bernanke?

Source:
Hey, Bernanke Bashers: His Moves Have Been the Right Ones
RANDALL W. FORSYTH
Barron's April 29, 2008
http://online.barrons.com/article/SB120939353075949559.html

Bear Stearns Bailout "Worst Fed Mistake in a Generation"

Monday, April 28, 2008 | 05:00 PM

in Federal Reserve | M&A

Here's a glimpse at what must have been a fascinating discussion:

"The Federal Reserve's moves to prop up Bear Stearns Cos. will come to be seen as "the worst policy mistake in a generation," the Fed's past head of monetary affairs said. The action is comparable to "the great contraction" of the 1930s and "the great inflation" of the 1970s, said Vincent Reinhart, a scholar at the American Enterprise Institute, who retired from the Fed last fall.

Mr. Reinhart's assessment, delivered at a panel discussion at the institute Monday, is one of the harshest appraisals yet by a high-profile observer of the Fed's decision in mid-March to lend money to Bear both as temporary funding to make a merger possible, and then to finance $29 billion of Bear's assets to make its takeover by J.P. Morgan Chase & Co. possible."

I'd love to get a recording or transcript of the speech. Any one have access?

Source:
Ex-Fed Official Declares Bear Deal Worst Mistake in a Generation
GREG IP
April 28, 2008 4:10 p.m.
http://online.wsj.com/article/SB120941300416350473.html

Report on UBS' $37 Billion Writedown

Saturday, April 26, 2008 | 07:06 AM

Kids, we have some fascinating reading in store for you this weekend.

The "conservative" Swiss banking giant UBS -- and I put that in quotes for obvious reasons -- wrote down a previously unimaginable $37 Billion dollars. Their shareholders were (ahem/cough) quite perturbed. So the nice folks at UBS, with an assist from KPMG, put together a 50 page report detailing the hows and whys UBS took such a humungo hit.

For what you would expect to be a dry report, it is absolutely compelling reading. It explains much more than the subprime fiasco. The report implies that management didn't really understand what the hell they were getting into with their purchases of Warburg/Dillon Read Capital Management. This unit eventually became UBS' internal hedge fund (it has since been shut down).

I wonder if management ever truly understands the nuts and bolts of these large acquisitions. We will find out if JPM knew what they were ~~getting into~~ getting the Fed into with the Bear Stearns (BSC) acquisition.

The report includes an indictment of the firm's compensation packages. The current structure -- big salaries and bigger bonuses -- encourages the riskiest and most short term of strategies. Prudence, risk management, and long term thinking were not money makers for employees. When the time came for the company to take its writedowns, many of these bad actors were long since gone. Go on, take the money and run.

You may not be surprised to learn that external consultants were involved and recommended "streamlining of risk processes." I don't know if these unnamed consultants were McKinsey & Co., but the whole description has a faint Enron-like smell to it.

A few other questions arise from the report:

Why do very risky strategies seem to end up in Fixed Income ?

How did Risk Control fail so badly?

Why was there an "Absence of risk management" and "Incomplete risk control methodologies" ?

Who created these compensation system ?

Again, this is just the tip of the iceberg in terms of asking what went wrong.

I wonder if this the inevitable banking equivalent of the Minsky moment. Perhaps these megabanks are simply too big, too unwieldy to be appropriately managed as hedge funds, rather than sleepy conservative banking institutions. The perverse incentives encourage reckless behavior.

Fascinating stuff . . .

Sources:

Shareholder Report on UBS's Write-Downs
18 April 2008
http://www.ubs.com/1/e/investors/agm.html

UBS ShareholderReport.pdf (download)

Related:

A good name sliced, diced and traded
John Gapper
FT, April 24 2008 03:00 | Last updated: April 24 2008 03:00
http://www.ft.com/cms/s/0/51099762-1198-11dd-a93b-0000779fd2ac.html

How UBS came undone
Roderick Boyd
Fortune, APRIL 23, 2008: 4:38 PM
http://money.cnn.com/2008/04/23/news/companies/ubs_deflates.fortune/

Too many risks, too few controls, says UBS report on write-downs
David Gow in Brussels
The Guardian, Tuesday April 22 2008
http://www.guardian.co.uk/business/2008/apr/22/ubs.europeanbanks

Murdoch's WSJ Changes Creates Opening for NYT, FT

Thursday, April 24, 2008 | 10:00 AM

in Corporate Management | Financial Press | M&A

Is Rupert Murdoch's altering of the Wall Street Journal creating an opening for his competitors?

That was one of the topics we discussed at Tuesday evening's NYU lecture on media, business, and blogging. This morning, we are going to briefly explore that.

In the past, I have offered up advice to various media. I have offered solicited advice to the WSJ about their blogs, and unsolicited advice about their subscription model. I have also consulted for several magazines in the financial space -- a time wasting and frustrating experience.

Today, I am going to offer some free advice to competitors of the WSJ, the New York Times, and to a lesser degree, the FT. In particular, I want to look at how the changes at the Journal may be potentially creating a strategic opening for the Times. Free advice is worth what it costs, so take from it what you may.

When Murdoch took over Dow Jones, he had some very specific plans in mind for the crown jewels of the company, the Wall Street Journal. Murdoch recognizes that the WSJ dominates the space for business and financial reporting. Just imagine what we could do with that platform, went the thinking, if we could only extend that reach and influence beyond financial news. In short, become more like the NYT.

In my opinion, this is a deeply misguided and risky undertaking, driven more by ego than profit motive.

Allow me to explain.

The WSJ is, at present, a must read news source for the financial industry. At our NYU lecture, it was noted that nearly half of WSJ 2 million subscriptions are expensed -- meaning, the subs are a tool for the employee paid for by the office. NYT subs, by comparison, are expensed in the single digit percentages.

Its easy to understand why: The Journal has traditionally been a pure business paper, covering corporate activity, Wall Street, venture capital, business travel, investment banking, commodities, fixed income, currencies, corporate earnings, economic matters, SEC issues, etc. There was a smattering of related non business coverage easily justified by the advertising it brought in, along with a few odd stories that broke up the otherwise wall to wall business coverage.

Murdoch's changes are both ambitious and perplexing: He is seeking to shift the Journal's coverage to include much more politics, more elections, more general government activity. The Journal itself reported the move to "put short articles on the front page or the fronts of sections that would not continue on inside pages." The fear that paper might shift rightward in its news coverage has proven to be unfounded (so far); instead, it is the topics and subjects covered that is what is shifting. Coverage of Financial news is losing out to Mr. Murdochs true love: Politics.

In other words, Murdoch is "De-Financializing" the paper. The coverage looks to becoming less business and money oriented, and more of a general interest paper -- kinda like what the Washington Post and the New York Times already do.

In trying to extend the WSJ's reach, Murdoch has left open its flank. That creates the opportunity for shrewd operators to expand their Business news. Hence, the opportunity for would be Journal's competitors, and in particular, the NYT, to go after the Journal's audience. The business goal would be to capture a significant percentage of the Journal's expensed subscriptions.

How? First, I would beef up the business pages. Hire additional staff, especially the reporters at the WSJ itself. Second, raid the most popular WSJ blogs. They have some terrific coverage there, and that would carry over well to the NYT.com site. Even if unsuccessful in the hires, it makes the operation of the WSJ more costly -- a technique not unfamiliar to Murdoch. Expand the business video coverage, using embeddable flash. Lastly, take the very successful Dealbook model -- close integration of the blog, newspaper columns, and email list -- and clone it to other related business issues: Marketbeat, RealTime Economics, etc.

When a great General extends his army in reaching to conquer far flung lands, a flank gets open. It creates strategic opportunities for competitors. How, and when they take advantage of the opportunity is up to them...

UPDATE: April 24, 2008 1:14pm

I totally agree the the FT is a viable competitor also; indeed, the opportunity is there -- the "flank" is exposed -- but I don't know if the NYT has the capability to respond in an aggressive manner. (I'll add FT to the title)

Once the WSJ jumps from CNBC to Fox Business, it will be a race between NYT and FT to see who else slips into that slot.

UPDATE2 : April 24, 2008 11:04pm

Ya can't go wrong with a good bar chart:

via Journalism.org

Previously:
WSJ Joins the Blogging Crowd
http://bigpicture.typepad.com/comments/2006/03/dow_jones_blogg.html

WSJ: Free or Paid? (Yes)
http://bigpicture.typepad.com/comments/2007/10/advice-for-murd.html

The Media Goes Blog Crazy!
http://bigpicture.typepad.com/comments/2006/06/the_media_goes_.html

MSM Blogging Review: NYT Starts Blogging too
http://bigpicture.typepad.com/comments/2006/03/blogging_review.html

>
Sources:
Editor Out as Murdoch Speeds Change at WSJ
JESSICA E. VASCELLARO, MERISSA MARR and SAM SCHECHNER
WSJ, April 23, 2008; Page A1
http://online.wsj.com/article/SB120887959358334849.html

Graphic courtesy NYT
http://www.nytimes.com/imagepages/2008/04/23/business/20080423_PAPER_GRAPHIC.html

Today's Infoporn: Follow the Money in Global Dealmaking

Wednesday, April 02, 2008 | 11:44 AM

in Credit | Finance | M&A

NYT's special Dealbook section today had a deliciously giant graphic on the global path money takes in today's deal making. You may have stumbled across it in print, but found it difficult to track down on line. It was buried in the Dealbook blog, and required a few extra clicks.
>

click for ginormous version

Source:
Follow the Money
ANDREW ROSS SORKIN
NYT Dealbook, April 2, 2008, 2:03
http://dealbook.blogs.nytimes.com/2008/04/02/follow-the-money/

Arthur Levitt on the Bear Bailout, SEC, Fed

Sunday, March 30, 2008 | 03:00 AM

in Credit | Federal Reserve | M&A

Former U.S. Securities and Exchange Commissioner Arthur Levitt talks with Bloomberg's Carol Massar from Palm Beach Gardens, Florida, about the Federal Reserve's involvement in the rescue of Bear Stearns Cos., and potential implications for the financial-services markets and regulators.

click for video
(launches Windows Media Player)

Watch

Source:
Levitt Says Bear `Bailout' Raises New Regulatory Issues: Video
Bloomberg, March 26 2008
mms://media2.bloomberg.com/cache/vSIw1QRzGAHM.asf

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JPM Deal: Buy Bear Stearns HQ, Get iBank (almost) Free!

Monday, March 24, 2008 | 03:37 PM

in M&A

With the $2 deal now gone, and a new $10 deal agreed upon, the agitation has begun for a $15 deal.

I am considering the $10 deal as buying the HQ property for $1.1B, and getting the rest of the firm for a mere billion bucks.

But those who think they should be pushing their luck may want to be a bit cautious. At a certain point, JPM may just say, "thanks for the building, you've got 90 days to vacate . . ."

History of Panic Buying

Friday, March 21, 2008 | 02:15 PM

in Investing | M&A | Psychology/Sentiment | Trading

Nice bit of chart porn via Forbes, which writes: "JPMorgan's Jamie Dimon may prove to be the latest in a line of investors to turn panic into profits. But it's a risky business."

click thru for bigger graphic

Source:
When Blood Is on the Street
Neil Weinberg, Bernard Condon and Emily Stewart
Forbes, 04.07.08, 12:00 AM ET
http://www.forbes.com/forbes/2008/0407/034.html?partner=magazine_newsletter

Two Dollars/share, or an "Orderly Liquidation" ?

Sunday, March 16, 2008 | 09:01 PM

in Corporate Management | Credit | Derivatives | M&A

You call this a rescue?

Bear Stearns Cos. reached an agreement to sell itself to J.P. Morgan Chase & Co., as worries grew that failing to find a buyer for the beleaguered investment bank could cause the crisis of confidence gripping Wall Street to worsen.

The deal calls for J.P. Morgan to pay $2 a share in a stock-swap transaction, with J.P. Morgan Chase exchanging 0.05473 share of its common stock for each Bear Stearns share. Both companies' boards have approved the transaction, which values Bear Stearns at just $236 million based on the number of shares outstanding as of Feb. 16. At Friday's close, Bear Stearns's stock-market value was about $3.54 billion. It finished at $30 a share in 4 p.m. New York Stock Exchange composite trading Friday.

This was not a bailout of any sort.

What the NY Fed did was allow for an orderly liquidation. The Fed is providing the liquidity for JPM's Bear unwind, guaranteeing a good chunk of the debt:

"The central bank also approved the financing of JPMorgan Chase & Co.'s purchase of Bear Stearns Cos., including support for as much as $30 billion of Bear's assets."

What does THAT mean? "Support for as much as $30 billion of Bear's assets." Who is buying this -- the Fed, or JPM ?

Truly, an amazing development.

~~~

This whole affair raises many more questions than it answers:

• What sort of due diligence did British billionaire Joseph Lewis do prior to picking up 6% of Bear?

• The Fed cut 25 bps at the Discount Window Sunday night -- what is THAT gonna do?

• Goldman Sachs Group will announce asset writedowns of about $3 billion this week -- what else is out there in terms of iBank write downs?

• Nikkei off 3.6% in early trading; Dow Futures off 240, S&P 500 down -32.70, NASDAQ down -38.25

• Of all the firms most similar to Bear Stearns, one name keeps coming: Lehman Bros (LEH)

What more will we learn tomorrow?

Sources:
U.S. Fed Cuts Discount Rate, Says Dealers May Borrow
Scott Lanman
Bloomberg, March 16 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=asg0H5x.VQ4g&

A Stake Through the Heart
Bear's Biggest Holders May Have Little Choice But to Cut Their Losses
CASSELL BRYAN-LOW and KATE KELLY
WSJ, March 17, 2008
http://online.wsj.com/article/SB120571021671940207.html

J.P. Morgan Rescues Bear Stearns
U.S. Pushed Deal To Avert Crisis; A Fire-Sale Price
WSJ March 17, 2008
http://online.wsj.com/article/SB120569598608739825.html

Goldman Sachs to reveal $3bn hit
By Mark Kleinman and Louise Armitstead
Telegraph, 12:07am GMT 16/03/2008
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/16/cngold116.xml

Was a Private Equity Bid for Yahoo Thwarted by Microsoft ?

Monday, February 11, 2008 | 06:00 AM

in Corporate Management | M&A | Valuation | Web/Tech

Last week, before the Microsoft (MSFT) deal was rejected by Yahoo's Board, some interesting chatter was bouncing around NYC.

The latest rumor to make the rounds was that Yahoo (YHOO) was just about to announce a negotiated transaction for the sale of the company to an East Coast private equity firm. Then Microsoft stepped in the way. We first heard this story sometime between Mister Softee's $31/share, $44 billion hostile bid, and this weekend's rejection of that offer by Yahoo as an insufficient valuation for all of Yahoo's properties.

The rumors of this now pre-empted private bid include the following:

-to be announced as early as February 5th;
-negotiated price was in the $23-25 range;
-some Yahoo! properties to be spun out to shareholders;

Note that Microsoft has been eyeing Yahoo for several years. The latest service pack of their unrequited ardor was back in May 2007.

While this remains unconfirmed by anyone willing to make an on-the-record statement, it is well sourced enough that I suspect there is sat least some degree of truth to it.

There have been other publicly available evidence lending some support to the rumors:

• CEO Terry Semel, long opposed any takeover, stepped down January 31.

• The apparent urgency to enact Jerry Yang's 100 day plan seemed to have faded rather quickly. Putting this "Key turnaround plan" on the back burner could have been due to leaving major restructuring to the new owner.

• The suddenness of the Microsoft offer may have come about due to the PE bid. Mister Softee's NY lawyers and bankers likely heard rumors, or even deduced, the likelihood of a private equity bid.

• Microsoft's bid appears to have been calculated to preempt any further bidding or acquirers from becoming involved. With Yahoo's stock closing under $20 on January 31, a bid with a premium of "just" 25 or even 30% might have left room for another bidder.

• Microsoft appears to have taken a "time-is-of-the-essence" approach. They obviously know that each and everyday, Google's lead widens over both companies. From both a valuation and practical perspective, Microsoft made an offer that is all but impossible for another firm to top, and facilitates the most rapid acceptance by Yahoo.

~~~

With the Writers Strike now all but settled, we still are months away from fresh television content. Until that happens, we will just have to make do watching this technology soap opera play out . . .

Yahoo to Microsoft: No, Thank You

Saturday, February 09, 2008 | 06:20 PM

in Corporate Management | M&A | Valuation | Web/Tech

"They tried to make me go to Redmond, I said, No! No! No!"

The WSJ is reporting that the Yahoo Board of Directors plans to reject Microsoft unsolicited $44.6 billion offer:

"After a series of meetings over the past week, Yahoo's board determined that the $31 per share offer "massively undervalues" Yahoo, the person said. It also doesn't account for the risks Yahoo would be taking by entering into an agreement that might be overturned by regulators. The board plans to send a letter to Microsoft Monday, spelling out its position.

Yahoo's board believes that Microsoft's is trying to take advantage of the recent weakness in the company's share price to "steal" the company. The decision to reject the offer signals that Yahoo's board is digging in its heels for what could be a long takeover battle. The company is unlikely to consider any offer below $40 per share, the person said...

Yahoo has taken "poison pill" provisions to prevent an unwanted takeover. Microsoft would likely have to oust the board in order to overturn them."

And this isn't even the news I was referring to yesterday . . .

Source:
Yahoo Board to Reject Microsoft Bid
MATTHEW KARNITSCHNIG
WSJ, February 9, 2008 5:20 p.m.
http://online.wsj.com/article/SB120257515426256541.html

Performance Review: Google vs. Micro-hoo

Friday, February 08, 2008 | 01:30 PM

in M&A | Technical Analysis | Trading | Web/Tech

An anonymous friend from college points out an interesting aside:

There has been lots of buzz about the battle royale between Microsoft, Google and Yahoo. For all the jockeying, it's an interesting coincidence that all 3 are back to where they started from 12 months ago.

To a buy & hold investors, nobody in this group impressed much:
>

>
I actually have a fascinating piece of intel about the Yahoo! deal, but I cannot release it til Monday. See this space then for a shocker.
>

Micro-Hoo!™: Desktop vs Internet

Saturday, February 02, 2008 | 07:09 AM

in Corporate Management | M&A | Web/Tech

Alternative title: Who Do You Trust?, Part II

Last month, we looked at the question: Who Do You Trust?. That discussion considered how the issue of trust impacts various corporate tech firms.

In light of yesterday's *Micro-Hoo!™ announcement, I thought it might be interesting to revisit the issue. In our Trust discussion, we looked at a few firms -- Apple, Microsoft, AOL, Google, Dell, and Yahoo. At the time, I observed:

"Consider: Apple (AAPL) can get away with a snafu like the iPhone pricing issue, because it has earned the trust, even the adoration, of its users. Could you imagine having that trust with Microsoft (MSFT)?

Dell used to have that trust, but frittered it away, as they moved from one of the best to much worse customer service in the PC space. AOL also -- they've decayed, become a garbage service for the clueless. (AIM remains mostly worthwhile).

Google (GOOG) has earned my confidence, and -- so far -- has not given me any reason to reconsider that trust.

Yahoo (YHOO) still has some residual trust -- but its waning fast. I still use Yahoo as a home page, but their inattentiveness to some of their properties is shameful. They have a very, very brief period to right the ship, or their long horrific slide into irrelevancy will be irreversible. Yahoo has frittered away so many good properties, I find it embarrassing. (WhoTF is advising them?)"

Now, Trust sounds like "a warm fuzzy" -- a non-quantifiable thing that no one in business school will spend much time on. But when it comes to your personal data and the internet, Trust is a key component. Further, Trust may be the one variable that may determine how successful this merger is in the years to come. (See Paul's look at online market share).

Amongst all the cheerleading on the announcement (CNBC was something to behold Friday morning), I have yet to see this issue discussed. Hopefully, we can remedy that here.

Our question of the moment: Why has Microsoft never really caught fire online the way they did on the desktop? I don't want to get into another run-of-the-mill Microsoft bashing; rather, this is a genuine attempt to understand and explain their failure in the online arena.

The obvious answer was they had(have) a desktop monopoly, and no one controls 95% of anything online. But given their massive cash hoard, their deep programming ability, and a couple smart guys at the top of the company, why have all of the Microsoft online properties been duds? The list is rather surprising:

Hotmail
MSN
Internet Explorer
.Net
Live Spaces
Local Live (Maps)
Messenger
Live Search

Is there a single online property created by Redmond that lit it up? Not one dominates their space. Everyone of these offerings is second or 3rd tier also-ran that imitates another innovator. Hotmail is the closest thing to a success (and most people use that as their garbage account).

I have a theory as to this phenomena, and Steve "my-kids-cant-have-an-iPod" Ballmer ain't gonna like it.

The Microsoft user experience has never been particularly pleasant. I don't mean relative to Macs or Google or what have you, I mean objectively, its always been a mediocre, buggy, difficult, crash-prone, virus-laden, oh-well-call-it annoying experience. Counter-intuitive doesn't begin to cover it.

This god-awful user experience is no secret; I'm not breaking any news here. In fact, it is so well known that you probably have overlooked it as an issue. But websurfers obviously haven't. Over the years, anyone with with a PC has had ingrained onto their psyches EXACTLY what the Microsoft user experience was.

Once Apple's products became price competitive, they exploded in sales; Why was that? (iPod Halo? Puh-leeze!). Outside of Windows/Office, MSFT's biggest success is the X-Box. From the gamers perspective, there is absolutely no PC/Windows involvement whatsoever.

This is no coincidence.

Ask yourself this question: When you first heard that Ford was using Microsoft's Sync for their car audio/navigation/communication, what was your reaction? Gotta get me a Mustang! or Man, are they toast. Which was it?

Even if Windows were to suddenly become pleasant, it would take a very long time to overcome that prior set of experiences. Although I am not a fan of General Motors products, speaking objectively, I can say their cars have become much improved -- more reliable, better designed, improved build quality. They are just about on par with Nissan and Subaru, and pretty close to Honda and Toyota. Yet its going to take GM many years to overcome the perception of their brand as being nowhere near Honda or Toyota.

Microsoft has a similar branding issue, and I think its part of the reason why their online offerings have fared so poorly. In the corporate computing environment, you had no choice -- you worked on the machine the IT department gave you.

But online? "CLICK!" Buh-bye!

Stop for a moment to consider how brilliant Google's motto -- Don't Be Evil -- turned out to be. Its not just that our competitor's products are inferior, they are on the wrong side in the eternal struggle between good and evil. Now that's some good product positioning!

~~~

Back to our issue of Trust: I know of no one that unreservedly trusts Microsoft. Plenty of people still trust Yahoo!. Google, like Apple, is widely trusted.

I wonder how many current Yahoo! users will find alternatives to Micro-Hoo!™ once this merger closes. The deal risk here is a mouse. its not the usual integration/cost savings accounting stuff, or the clash of corporate culture bullshit we'll be hearing so much about over the next few weeks.

No, the real risk here is "CLICK!".

We've seen the expensive opening gambit from Microsoft. It will be quite interesting to see how Google responds to it. Google apps is a not so subtle stab at one of Microsoft's cash cows. Look for a similar attempt to wrest more revenue, and even more portal traffic away from Yahoo!.

"CLICK!".

~~~

* Micro-Hoo!™ is a registered trademark of Infectious Greed.

Microsoft Takeover Bid for Yahoo!

Friday, February 01, 2008 | 06:34 AM

in M&A

This morn, all eyes are on the takeover proposal, in a letter from Steve Ballmer to Yahoo's Board of Directors, stating an offer of $31 in cash or 0.9509 of a share of Microsoft common stock per share for Yahoo (YHOO). The total deal valued at $44.6 billion -- a huge 62% premium to Yahoo's closing price of $19.18.

The most interesting part of this is that Mister Softee seems to have waited until Google had its first bad earnings report -- missing the earnings consensus by 2 cents, and perhaps looking in their eyes, vulnerable. Perhaps it was coincidence, but the timing looks fortuitous.

A few questions immediately pop up:

Why is Ballmer & Co. paying such a big premium? Does this imply the entire Tech market is hugely undervalued -- or is Microsoft (MSFT) desperate to catch up with Google (GOOG)?

And since Mister Softee was so desperate to stop the Google/DoubleClick deal on Anti-Trust grounds, it makes me wonder if there will be any legal issues between a marraige of Yahoo and Microsoft. Obviously not for search -- their combined market share is still tiny compared to Google. But consider what these two companies are: the biggest software maker now wants to get together with the biggest web portal. That could certainly raise some valid anti-trust issues.

What is not known yet is how the two different search technologies -- Yahoo's Panama, and Microsoft's -- will integrate.

I'll go even a step further: Mister Softee's biggest cash cows -- Windows and Office -- look shakier than they ever have. There are real competitors for PCs (Apple, Linux) and lots of free or nearly free office software (Open Office, Google Apps). I assume Microsoft is projecting out current trends 5 and 10 years; they might truly believe that if they can't compete in the online search/advertising space, they are in trouble.

Here's the ironic part: The 2 most visible losers in the search area may be getting together -- and somehow, that's worth 150 point swing to the Dow futures.

I guess the negativity isn't quite as excessive as some people claim!

~~~

Some recent, related headlines:

• Yahoo Says Former Chief Semel Steps Down as Chairman (Bloomberg, 1/31)

• Google posts 17% profit gain, but shares slide lower (Marketwatch, 1/31)

• and the WTF headline: Google’s Loss Is Murdoch’s Gain (NYT's Bits)

Source:
Microsoft Letter to Yahoo!
PRNewswire-FirstCall, February 01, 2008: 06:30 AM EST
http://money.cnn.com/news/newsfeeds/articles/prnewswire/NYF04001022008-1.htm

Monoline Insurance: There's a New Sheriff in Town...

Tuesday, January 29, 2008 | 06:15 AM

in Corporate Management | Credit | Derivatives | M&A | Valuation

The monoline insurers -- the firms that issued default insurance on muni bonds that never default -- have been buried by more than a trillion dollars worth of derivative bets, more than 10% of which have gone bad.

That $130 Billion worth of CDO/CDS exposure makes it highly unlikely that anyone is coming along to rescue this group of risk-loving, derivative-misunderestimating, technically-bankrupt insurance managers. As we mentioned saeveral weeks ago,

While absurd rumors swirled around the unlikely purchase of Ambac (ABK) by Wilbur Ross, various other forces have been moving to make sure that the bond assurance will continue to exist for various state and city projects. Even though Munis very rarely default, the cost of Bond Assurance ends up paying for itself many times over, as it allows cities and towns to pay significantly less in borrowing costs over the life of the bond issuance.

As we mentioned several weeks ago, that was a lovely, low risk business, with little defaults and a steady revenue stream. At one point in time, AMBAC had the highest revenue per employee on the planet. That situation was obviously intolerable, and so managment embraced riskier, higher yielding derivatives. Over that period, the monoline stocks have lost about 90% of their value. (Ouch!)

The latest rumor making the rounds is that Wilbur Ross will buy Ambac. Reports that Ross will invest in the battered bond insurer Ambac have soothed investors. But as Roddy Boyd argues, the deal makes no sense whatsoever:

"If Ross were to purchase Ambac in an "as-is" arrangement, he would be buying an enterprise with a staggering $67 billion in CDO exposure, of which $29.1 billion consists of asset-backed CDO's of increasingly dubious credit quality. The company also has $8.4 billion in sub-prime mortgage paper in its portfolio. All told, Ambac's financials show that the insurer has $14.5 billion of claims-paying resources to support a $524 billion guarantee portfolio, figures so unbalanced that the company's attempt to raise $1 billion or more in emergency capital via an equity or convertible offering had to be scrapped last week."

Now, with the monolines bouncing on the highly unlikely take out by Wilbur Ross, a new sheriff has come to town: Warren Buffett has "agreed" to expand Berkshire's new bond insurer nationwide -- in exchange for faster licensing -- according to a group of U.S. state regulators.

In order to come into one of the most profitable and mismanaged segments of insurance underwriting, Buffett has coyly struck a deal that fast-tracks the messiest part of the business. Now THAT'S bloody brilliant.

Here's Bloomberg's take on the matter:

"Cathy Weatherford, chief executive officer of the National Association of Insurance Commissioners, on Jan. 10 offered to help speed approvals if Buffett's new company agreed to simultaneously apply to all states with a uniform application, NAIC spokesman Scott Holeman said today. "Berkshire has committed,'' Holeman said in an interview.

Berkshire's bond insurer may help stabilize debt markets, which have been roiled by the prospect that MBIA Inc. and Ambac Financial Group Inc., the industry's biggest guarantors, may lose their top credit rankings. A downgrade may affect $2.4 trillion in assets industrywide, and Fitch has already stripped its AAA rating from Ambac after losses tied to subprime loans.

To induce Omaha, Nebraska-based Berkshire to submit the application to all states, NAIC proposed a pilot program waiving a requirement that an insurer using a uniform application have a track record in the type of insurance for which it wants new licenses, Holeman said.

I was originally going to title this "Buffett to Wilbur Ross: Up Yours" but I thought that too harsh. And Ross seems to smart to buy into the Ambacv/MBIA snake oil . . .

Previously:

Counter-Party Risk
Friday, January 18, 2008 | 07:30 AM
http://bigpicture.typepad.com/comments/2008/01/counter-party-r.html

A Regulator Not Stymied by Red Tape
JOSEPH B. TREASTER
NYT, January 9, 2008
http://www.nytimes.com/2008/01/09/business/09buffett.html

Sources:

Has Wilbur Ross lost his mind?
Roddy Boyd
Fortune, January 25 2008: 4:19 PM EST
http://money.cnn.com/2008/01/25/news/newsmakers/boyd_ross.fortune/index.htm

Buffett's Bond Insurer to Go National, Regulators Say
Josh P. Hamilton
Bloomberg, Jan. 28 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aAgiUPbIXPTs

Tuesday, January 29, 2008 | 06:15 AM | Permalink | Comments (21) | TrackBack (1)