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.
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
January 29, 2008
Just for fun…. Click the video below and ask yourself if something looks a touch familiar about of the AOL and Yahoo! sites. Click it over and over.
With all of the problems that both companies have encountered (GOOGLE) and the competition they endure (GOOGLE), it would be of great benefit to look towards a consolidation rather than a fight. Aside from the graphic similarities, there is a great deal of overlap between both of these companies.
In their earnings announcement, Yahoo Inc. (YHOO) reported a drop in quarterly profit on Tuesday and its shares fell nearly 7 percent as Chief Executive Jerry Yang predicted a tough 2008 amid a weakening U.S. economy.
“While we will continue to face headwinds this year, we believe that the moves we are making will help us exit 2008 stronger and more competitive and return to higher levels of operating cash flow growth in 2009,” Yang said in a statement.
The article continued to explain, “Yahoo’s larger share of the display market makes it more vulnerable to any spending pullbacks in a recession. Analysts expect key rival Google Inc (GOOG) may fare better in a downturn with its dominance of paid search listings, a form of advertising that is viewed as more closely tied to sales.”
News outlets are not impressed with Yahoo! results either:
Yahoo net drops as reorganization stays in focus
at MarketWatch (Tue 5:00pm)
Yahoo 4Q Earnings Fall Over 23 Percent
AP (Tue 4:59pm)
Yahoo Q4 In Line; Q1, ’08 Outlook Light; Stock Slumps
at Barron’s Online (Tue 4:53pm)
Yahoo disappoints investors again
at CNNMoney.com (Tue 4:49pm)
Another flop at Yahoo!
at Fortune (Tue 4:44pm)
To the Yahoo! an AOL team: DO SOMETHING! ANYTHING EXCEPT WHAT YOU HAVE BEEN DOING! Shareholders are losing out because of your stubbornness. Be brave, be daring and think of the little ant that moved that rubber-tree plant. You can do it…!
Disclosure: Horowitz & Company clients do not hold positions in stocks mentioned as of the publish date.