Yahoo's Stalling, but They Can't Escape Microsoft's Grasp

Implications: Yahoo is doing whatever they can to avoid a Microsoft takeover, but it is becoming obvious that they will have no choice but to fall prey to the Seattle giant, in large part because their other suitors - News Corp, Google, and AOL - could never exude the leverage that Microsoft could.  In truth, the merger is likely good for the marketplace, as Google is becoming far too dominant of a player in search and other Internet categories.  The only questions left to ask may be whether the takeover will be hostile or not and whether the deal will pass federal scrutiny.

Analysis:

Yahoo has done a poor job managing its assets, and now faces one of the ultimate consequences, a hostile takeover.  Shareholders for Yahoo cannot be satisfied with the company's performance: the stock is at the same level as it was in 2004. 

 

Though the company touted the Panama platform, industry insiders knew that the platform was far too late to market.  Google had introduced its AdSense platform several years earlier and rocketed to its search lead.  And, instead of switching focus to new endeavors, they’ve muddled their way through a myriad of Web 2.0 and mobile ventures.  They’ve had a recent flight of talent away from the company, and there is no reason to believe that this flight will abate.  The sad thing about it is that they have very talented team members and truly worthwhile projects, as Yahoo Answers, One Search for mobile, and Flickr.  So, they’ve now eroded shareholder value and confidence to the point of no return.

 

Though Yahoo is doing its best to fight this battle, and I truly believe they are loathe to accept the “evil empire” of Microsoft as their suitor, it seems impossible for them to evade takeover.  Now, all they can do is raise the value of their company.

 

To this end, they are actively seeking suitors.  They’ve talked to Google about being an outsourced search partner.  Of course, Google considers it in their best interest to keep Yahoo out of Microsoft’s hands.  They’ve talked to News Corp about a potential sale, but News Corp doesn’t appear able to make the purchase.  That’s good for all of the Net, as the history of content companies purchasing large Internet entities is not a good one.  And they’ve talked to AOL, who was part of the poorly matched and executed merger with another content company: Time Warner.

 

Microsoft is the only real option for Yahoo.  The deal makes sense, as it allows the merged company to present a viable alternative to Google, which neither company on their own can do.  I’m not sure if it will deliver its desired goal, as there is no reason to believe that a merged company can innovate better than the parts (and the Yahoo brain drain will accelerate post-merger), but at least they will be able to gain cost savings, larger reach, and dollars to expand.

 

For now, Yahoo’s only true option to me is to continue to try to raise its offering price, lest the initial offer from Microsoft become a hostile one.