Yahoo's Pain is Micosoft's (and of course Google's) Gain

Implications: Sure, Google gets the best out of the deal with a weakened Yahoo and a non-strengthened Microsoft, but I'm not sure if this deal would have been good for Microsoft anyway.  They showed a lack of brutish eagerness that has hurt Yahoo, near fatally, and that hurt could help Microsoft climb up the search ladder at Yahoo's expense.

Analysis:

The Yahoo – Microsoft debacle showed some phenomenally poor negotiating skills by Yang and the Yahoo team.  On the other hand, I completely disagree with Legg Mason Miller’s comment that Microsoft emerged as the biggest loser in this deal, by not extending an of

The Yahoo Story

It was obvious from the start that Yahoo did not want Microsoft’s hand, as I mentioned in Yahoo’s Stalling on 3/17, though, at that point, I truly believed that Microsoft would gain hold of the Silicon Valley falling giant.  Yahoo did not fit culturally with Microsoft, and, to me, it fully appeared as if Yang and others felt that they would have failed with a sale.   They approached News Corp, AOL, and even Google to change the ballgame.  This psychological impediment to the deal was much larger than the valuation impediment, as the valuation impediment was actually quite small. 

Now, Yahoo is without a suitor, or, if Microsoft or others come back with another offer, that offer will be less than the last one on the table.  Yahoo is in a very bad positioned.  They were weak before the deal, with a soft stock price and a decreasing search market share, and now they are weaker.  They’ve been distracted.  They’ve been demoralized.  They’ve already seen significant defections, and they are going to see more.  They may have ceded a piece of their search to Google, through the ad deal, for short-term gain over long-term brand loss.

Was Microsoft Better for Dropping Out, and Did They Increase their Relative Power in Search by Weakening #2?

The answer to the second part of this question is yes.  Microsoft did not improve their search prospects by gaining Yahoo, but I think they did help quicken Yahoo’s deterioration.  Of course, this will help Google, probably more than it will help Microsoft or AOL, but it will also help Microsoft.

I’m not sure now, and I wasn’t sure then, that Microsoft would be helped by a Yahoo deal.  It is no sure bet that a combined company would increase search market share by a joined company.  My guess is that 1 + 1 in this argument would equal significantly less than 2.  Whether the other properties, as Yahoo’s portal or banner deals and Yahoo’s social and Web 2.0 properties (as Yahoo! Answers and Flickr), would improve with Microsoft’s support is also an open question.  

Surely, the cultural fit was awful, and one could argue that both the AOL – Time Warner deal and the Sprint – Nextel deal were in part buried by this cultural misfit.  Additionally, Microsoft might have trouble truly leveraging these properties in addition to suffering a brand backlash.  I understand why Microsoft would attempt this deal, as they are losing the Internet battle, but I would have put the risk of less value for the money at greater than 50%.

Microsoft’s BATNA

We often ignore BATNAs in deal making, and it appears as if Microsoft hit theirs.  They determined that $33 per share was the maximum that they would go before walking away, and then they walked away.  Good for them.  The small increment in increase could have made the deal sour for them, per their valuation.  As I mentioned above, it certainly wasn’t a sweetheart merger anyway.

Microsoft’s Increasingly Powerful Hand in Negotiations

Plus, they now have a more powerful hand should they go back.  Dropping out made Yahoo weaker.  It made the Yahoo board mad at Yahoo.  It even made Yang say that they would have been willing to talk and were surprised by Microsoft backing out.  This alone makes it a good idea to drop out, should they decide to come back in.  They’d be able to get Yahoo for a lower price.  Not that I think they’ll do this, at least in the short-term.