What Now Yahoo? And What Now Microsoft? It’s Pretty Clear What Now Google…

By now you must have heard the news that Microsoft has walked away from the proposed marriage with Yahoo.  I got the first scoop on this from Michael Arrington.  Apparently Yahoo wanted $38 a share in the end and Microsoft would go no higher than $33.  That’s quite a gulf. 

Per Ballmer’s letter to Yang (which Microsoft themselves published), the Microsoft offer was a 62% premium to Yahoo’s stock initially, and rose to 70% later.  That’s a hefty premium: about twice the premium Oracle offered BEA, for example.

What’s next?

Yahoo’s response to the news focuses on the idea that, “The distraction of Microsoft’s unsolicited proposal is now behind us.”  Piffle.  The trouble is just beginning and that roar you hear is an oncoming freight train with the Yahoo bus stalled across the rails.

Scoble calls Yahoo, “a bleeding animal. Left lying, gasping for its breath, after a larger animal (Microsoft) struck and then walked away after it proved too difficult to eat.”  He goes on to list daunting challenges.  They’re mostly perception–perception that Yahoo is a wounded animal, perception inside and outside that Yahoo isn’t worth the $37 Yang asked for.  But perception counts at a time like this.  It’s very hard to rally the troops if they think the leadership did the wrong thing. 

The prevailing view is that lawsuits will fly, and it isn’t hard to see why.  Mathew Ingram flat out says, “Jerry Yang should be fired.”  He won’t be the first one to echo that sentiment, especially among shareholders.  Om Malik sees the offer withdrawal as Microsoft proving again that it is still the Prince Machiavelli of Technology.  The drama has proven that Yahoo has no real suitors to merge with and that its best option to remain independent is to give its online advertising to Google.  Surely that is a dreadful one-two combination for any company to face.

Fred Wilson, who thinks Yahoo did the right thing, started a poll to vote on how low Yahoo’s stock would go Monday when the markets open again in the wake of this announcement.  His vote is for a close at $26, since he feels Microsoft has shown the real value of Yahoo.  I voted $20, because I don’t think Yahoo is worth what Microsoft bid to anyone but Microsoft, or perhaps Google, but the latter isn’t going to happen for anti-trust reasons.  As I write this, the poll is focused on the $20-24 range and there are more betting it’ll fall below $20 than that it will hit Fred’s $26 target.

Will the Google deal still go through?  Most pundits think Yahoo has to pursue it to placate shareholders by increasing profits.  Certainly Yahoo has talked up the efficacy of the trial to the point where it seems hard to back down.  If they do, one would expect their excuse will be the regulatory issues both they and Microsoft have alluded to that are involved with giving Google that much more of the business.  Meanwhile Yang, Filo, and the Board will face a barrage of shareholder lawsuits.  Hard to see how the shareholders lose either.  The premium that Microsoft offered sure seems like the sort of thing that fiduciary responsibility would have compelled them to take.  In retrospect, they will seem unforgivably greedy.

Microsoft is not without angst either.  There had been a story that Microsoft’s MVP’s were pushing to kill the deal.  That reflects a lack of faith in Ballmer, whose baby this deal was.  It can’t have been comfortable for him to back down, although it does let him play the, “I’m more reasonable than you thought, after all,” card.  Techcrunch goes so far as to suggest Ballmer might need to go.  As critical as I’ve been of Microsoft, and of this deal, that’s just ridiculous.  I’ll chalk it up to link bait, although if there’s not some progress made on the Vista debacle over time that may change.

I think something a little different went down here for Microsoft.  I suspect Ballmer and others at Microsoft were genuinely surprised that Yahoo would fight so hard to avoid being assimilated.  These guys love Microsoft, and basically grew up with it.  I know from a lot of friends that there is tremendous loyalty there–just as much as at places like Google.  So I suspect they were genuinely puzzled, and a little bit hurt that Yahoo would spurn them.  After all, Microsoft is a great home for Yahoo, which in their minds was stumbling badly, and they had given Yahoo an incredibly generous offer to go fight mutual enemy Google.  Couldn’t Yahoo see that Google was eating the industry up alive?

Many say that the Yahoo deal was set up to define Ballmer’s career.  Don’t forget–Ballmer’s had a career for years and years at Microsoft.  I doubt he sees this deal as career-defining as others may.  In fact, his walk away seems to me to be a great sign of a mature leader not willing to win at all cost.  It’s a great counter-example to the volatile reputation that he’s developed over the years.

Ballmer’s letter to employees leaves the door open to pursue other partnerships and investments to realize the competitive avantages that come with scale.  Don’t be surprised if there isn’t more news at some point.  My own personal suggestion was that Amazon would make a better acquisition than Yahoo for a variety of reasons.  After all, Microsoft wants to own the cloud, and Amazon is rapidly selling lots for builders there.  Also, Ballmer is all dressed up and left at the altar.  He’ll be looking for another big date.  Who will it be?  MySpace?  AOL?  Someone else with scale?  $44B goes a long way.  A stumble from Facebook and it could land in the spider’s web.

I’ll go firmly on the record as saying Microsoft, and Ballmer, did absolutely the right thing here, and Yahoo has badly erred.  I never liked the Yahoo deal to start because I don’t believe it offers real value.  The bloom has been off the Yahoo rose for some time, and the company is in decline.  The premium offered was generous, and it has been rejected.  Time to move on.

How do others benefit or suffer from this outcome?  You have to figure Steve Jobs and Eric Schmidt think it’s all good.  At worst Google can continue to take share from the weak and disorganized, and Apple need not fear a suddenly resurgent Microsoft.  At best, Google gets the deal to take Yahoo’s advertising and they win big.  I just don’t see how they can lose on this outcome.  Even if Microsoft comes back later to try again, Yahoo is badly mauled and unlikely to be anything but weaker by then.

Whatever else happens, if either Yahoo or Microsoft seriously stumble from here on out in their fight against Google, this event will go down in history as the day the two sealed their fates.

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Amazing.  Here it is Monday morning and Yahoo has no announcement of an ad deal with Google nor any others news save vague platitudes from Yang.  The stock is getting hammered.  It’s epic and sad.

Meanwhile, guys like Jim Cramer (sorry, you have to pay to hear it, so I won’t give a link) have started ranting and raving about the hubris of Yahoo’s move to spurn Microsoft.  It’s going to get a lot worse!