Microsoft and Yahoo! – Facebook is the Real Reason

February 1, 2008

Balmer is dancing, Yang is sobbing. If you listen closely, you can almost hear the distant sound of Taps playing as the vultures are circling what is left of a once gorgeous technology story. After a pathetic quarter and an even more disappointing year, Yahoo! is now bleeding a slow death. The takeover announcement has opened a hole in the fabric of the universe today. It may seem like an alternative reality that Microsoft (MSFT) and Yahoo! (YHOO) will merge, but that was precisely what was announced. For $44 billion (66% premium), Microsoft will step up their web presence and create the most significant competition to Google (GOOG) that we have seen since Google’s inception.iTunes Subscribe

Throughout the morning, this announcement was the focus of CNBC discussions and online message boards. Admittedly, it was a left-field surprise to guests and reporters as well as individuals and institutions. One oddball standout in the discussion was CNBC’s commentator Jim Goldman who talked the deal down and continued his Gah-Gah praise (love affair) with Goo-Goo. One has to wonder what is his angle is as he seemed to qualify the news as nothing more than a fly in the ointment for Google’s long-term strategy. Jim, wake up… this easily throws a 900-pound monkey wrench into Google’s quest for global dominance for all things online.

As Google has been executing with almost flawless precision, Yahoo! has been generally fathering. So what makes this so attractive to Microsoft? It is simple, synergistic and an accretive transaction. It has also been estimated that it could provide a terrific addition to the bottom line, adding approximately $.13 of positive earnings per share to Microsoft. That is a deal worth doing!

Beyond that, the reasons and rationale will be tossed around for the next few weeks. Many have also questioned whether or not Google would thrown in a bid for Yahoo!. Truth be told, it is not their style. It would surely meet with regulators disapproval as Google holds the majority of market share. Anti-trust is not Google’s game. Even so, while it appears that this could take some market share, the combination is still not strong enough to significantly hurt Google.

So, why is this merger/buyout in the works? Simple…it is all about the the Facebook Nation. This is apparently the main focus of the Microsoft plan as they have been slowly moving towards a greater relationship with Facebook for some time. Have you taken notice of the sea-change to the look and feel of Microsoft as a company as they have finally realized that “square-corners” is not selling. Microsoft wants desperately to be hip. They own the desktop, but they don’t own the action/nightlife.


Think of a teenager living in their parent’s home. They use it as a place to flop, eat and wash. They tolerate their parents yet keep them at a social distance. Once they have their wings, they are out of there. Apple (AAPL) has done a good job at capturing the early adoption of many of the Gen-Xers and now Gen-Y is up for grabs. This is the social generation with idealism. “They’re after a sense of purpose, work-life balance, fun, variety, respect, and the opportunity to do ‘real’ work that makes a difference. Arguably everyone wants these things from a job but the difference with Generation Y is they’ll talk with their feet when their needs are not fulfilled,” explains by author Peter Sheahan in his book Generation Y.

The communication vehicle of choice is text messaging and Facebook. This generation is always-on in a virtual-conversation. Privacy is not as much of a concern to them as is the thought of knowing that someone is listening.

Yahoo! Offers sex-appeal and millions of potential opportunities for eyeballs and access for Microsoft. It a way of stepping up the cool factor for Microsoft to ensure that they will be the choice for search, operating system and mobile products for generations to come. The timing couldn’t be better as the first chink in Google’s earnings growth was announced just hours prior. There is a plan and it looks like it may actually work. Microsoft should be able to break out above the recent resistance of $35 if this actually goes through.

Disclosure: Horowitz & Company clients are LONG MSFT

VMWare – A WallStreet Chainsaw Massacre

January 28, 2008

Watching shares prices bludgeoned is never fun. After hours Monday, VMWare (VMW) bled and the red kept on coming like a scene from a third rate horror flick. The real scare is that there could be more to come.

For some time, we have been concerned about the potential implosion in share prices for VMWare (VMW) shares, since, as of late, there has been a painful awareness of the rotation/stampede out of stocks in which investors have high expectations for enormous earnings momentum. Even so, this particular stock has a very unique story, as it is one of the few pure-plays in the technology market today. We have now come to find this is also their Achilles heel. Further adding to the concern is the fact that in the next few weeks (February 11th), the first wave of available shares will flood the market as the initial lockup period ends for IPO shareholders. The dilution will continue over the next few quarters, which will conceivably add selling pressure. This thought has obviously been weighing heavily on investors and this has been vividly seen as the earnings report of January 28th, while not horrible, sent shares tumbling.

We have held that this stock was severely overvalued when we started to research this name. At that time, it was at $102 and it immediately apparent that the catalysts for growth were in danger as several factors were converging. Immediately, we added positions of the April $60 puts to selective client portfolios and paid a premium of $2.60.

Virtualization Diagram
Before getting into those details, maybe a quick review of the incredible technology know as “virtualization” should be addressed. If you have not heard about virtualization software yet, you are obviously not paying close attention. Perhaps one of the greatest technology advances in years, it is one reason that Apple Computers are able to run Windows…within a window. It has also been a big part of the internet’s explosion as servers are able to run multiple sites under the extreme efficiency provided by virtualization software.

Virtualization technology can trace its roots back to IBM at their Watson Research Center. Back then, the original concept was dubbed: time sharing. This can be further dated to a visionary paper written by Christopher Strachey entitled, Time Sharing in Large Fast Computers (1959).

In a recently released Executive Memo from Bob Nuglia, Senior Vice President of Microsoft’s Server and Tools Business, the history and future of virtualization is explored. One particularly interesting area of the memo was his historical references to the industry’s consolidation and the fact that Microsoft has all of their technology lined-up to make a major impact.

“Virtualization is not new. IBM first introduced virtual machine technology for mainframe computers in the early 1960s. Microsoft Windows NT included a virtual DOS machine. Virtual PC was introduced by Connectix in 1997 (Microsoft acquired Connectix in 2003). EMC’s VMware introduced its first product, VMware Workstation, in 1999. Softricity introduced SoftGrid, the first application virtualization product, in 2001 (Microsoft acquired Softricity in 2006).”

Adding to that powerful lineup, Microsoft announced a new relationship by press release on January 21, 2008.

“…an expanded role for virtualization as a key enabler of its Dynamic IT vision and outlined a companywide strategy to help accelerate the broad adoption of virtualization. To help drive its strategy, the company also announced the acquisition of Calista Technologies Inc. to improve the end-user experience for virtualized desktops and applications; an expanded alliance with Citrix Systems Inc. in the areas of client and server virtualization; more flexible licensing options for virtualization using Windows Vista; and new tools that provide best practices to deploy Microsoft virtualization software.”

Since its genesis in 1959, there have been dramatic changes and giant Read more