Microsoft’s sumo match with Google
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| Why the bid for Yahoo? Microsoft CEO Steve Ballmer is prepared to take drastic measures to make sure Google doesn’t shove the software giant out of the ring. Photo: Microsoft |
The depth of Microsoft’s online problem became clear 18 months ago, when Google trumped its bid to handle search advertising for MySpace, the popular social networking site.
MySpace owner News Corp. (NWS) liked Microsoft (MSFT) well enough. But it had to go with the money. Because Google (GOOG), the top search engine, could guarantee a larger audience and thus more revenue in a search deal, it won the MySpace account. “They said to Microsoft, ‘Look, if you can get there in revenue we’d prefer to go with you,’ ” said a source familiar with Microsoft’s side of the negotiations. “It came down to a pure economic decision.”
Technology battles often unfold like sumo matches, where the biggest companies win by pushing opponents around – and Microsoft, the world’s largest technology company by market value, has dominated the wrestling ring for years. But in the online world, Microsoft finds itself in the unusual position of small fry, getting shoved aside by Google.
Rupert to the rescue? Probably not
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| News Corp. is in talks with Yahoo about a possible combination. But is the deal real, or just a game? |
Does News Corp. really want a piece of Yahoo?
Word leaked out Wednesday that Rupert Murdoch’s News Corp. (NWS) is looking at taking a stake of 20 percent or more in Yahoo in exchange for MySpace, some cash and other online properties. An infusion from News Corp., the reasoning goes, could boost Yahoo’s stock price high enough to outstrip Microsoft’s (MSFT) hostile takeover attempt.
This is probably as close as Yahoo (YHOO) will get to a white knight scenario where someone saves the company from the clutches of Microsoft. But a News Corp. deal probably won’t happen.
Yahoo’s forcing Microsoft to play hardball
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| Yahoo’s board of directors has spurned Microsoft’s takeover bid, calling it too low. Courtesy of Yahoo. |
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| Yahoo stock spiked after Microsoft’s bid, reclaiming levels it last saw in November when investors were more optimistic. |
Yahoo’s (YHOO) board of directors unanimously rejected Microsoft’s (MSFT) marriage proposal as too cheap, a bold move that could force Microsoft to instigate a shareholder revolt in order to get its prize.
In a press release Monday morning, Yahoo said Microsoft’s offer of more than $40 billion “substantially undervalues” Yahoo’s brand, audience, investments and potential. On Wall Street, Yahoo’s stock started the week up about 2 percent and Microsoft down nearly 2 percent, suggesting that investors believe Microsoft will have to sweeten its offer.
Microsoft responded on Monday afternoon with a statement calling it “unfortunate” that Yahoo turned down its proposal, and saying that Microsoft “reserves the right to pursue all necessary steps” to ensure that shareholders get the opportunity to have their say.
Though Yahoo is playing hard to get, Microsoft has positioned the takeover as the only way either company can compete with a rapidly ascendant Google (GOOG). Google has such a dominant share of search engine customers that other companies can’t create a strong alternative, and advertisers have no choice but to spend most of their money with Google. Microsoft believes that by purchasing Yahoo, the number-two search provider and one of the most popular online destinations, it can quickly turn itself into a serious contender.
HP’s printer challenge
As sales growth slows, the focus shifts to services
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| HP Executive Vice President Vyomesh Joshi wants to use software and services to drive printing profits. Courtesy: HP |
Even during the bad times, Vyomesh Joshi’s printing business at Hewlett-Packard (HPQ) was the go-to place for good news. As recently as 18 months ago, the affable executive vice president’s unit accounted for more than half of the overall company’s operating profits.
But things have changed since HP’s dramatic turnaround took hold. HP’s computing group grew profits 75 percent in the October quarter by stealing market share from Dell (DELL) and riding the popularity of laptop computers. Meanwhile the Technology Solutions Group, which sells servers and other tech plumbing to big companies, is doing well too – last quarter operating profit jumped 31 percent to $1.4 billion. “Because of our footprint, because of our global nature, we are what we talked about in the fourth-quarter call,” Joshi says. “We are meeting our expectations.”
Which means Joshi’s Imaging and Printing Group no longer needs to prop up the rest of HP. It’s a good thing, too – because Joshi has his own transformation to worry about.
How Yahoo might get away
Microsoft’s $40 billion bid would be hard to refuse, but there are escape routes.
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| Yahoo co-founder and CEO Jerry Yang spurned Microsoft’s advances more than a year ago, and insiders say he’s now exploring ways to evade the hostile bid. Courtesy of Yahoo. |
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| Yahoo stock spiked after Microsoft’s bid, reclaiming levels it last saw in November when investors were more optimistic. |
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| Microsoft stock has slipped to September levels as investors express concern about its hostile bid of more than $40 billion for Yahoo. |
Since Microsoft bid more than $40 billion for Yahoo last week, the Internet pioneer’s future has been very much up in the air. Many observers seem to think Microsoft will win its prize, given the truckload of cash it’s offering — but others aren’t so sure. In fact, there are ways that Yahoo might get away.
If Yahoo (YHOO) co-founder and CEO Jerry Yang is to wiggle his company free of Microsoft’s (MSFT) clutches, he’ll have to:
a) Find a white knight willing to top Microsoft’s bid.
b) Outsource search to Google; or
c) Break off bits of the company to boost the stock price.
None of these options looks like a strong possibility. Here’s why.
For those who like the idea of Yahoo controlling its destiny, there’s a certain appeal to the white knight scenario — at least Yahoo gets to pick its suitor rather than submit to a shotgun wedding. But the problem here is that Yahoo’s carries an expensive dowry, and the companies that can afford it probably won’t pay.
Traditional media companies like Time Warner (TWX) or Disney (DIS) would be a natural fit, but they can’t afford Yahoo. Many of them already have plenty of debt, a paucity of cash, and the legacy of the AOL/Time Warner deal to remind them (and investors) how badly these old media-new media deals can go. The one company that might have had the credibility to make such a bid is News Corp. (NWS), but CEO Rupert Murdoch has already ruled that out.
Then there are the tech companies like Hewlett-Packard (HPQ), Cisco (CSCO) and Apple (AAPL), which, like Microsoft, could possibly afford to acquire Yahoo with a combination of cash, debt and stock. But why would they? Buying Yahoo means taking on Google, and that’s something most big Silicon Valley companies would just as soon avoid. Just look at Apple — Google’s maps are among the most popular pieces of software on the iPhone, and Steve Jobs has said his engineers love working with Google. Why mess with a good thing?
And what about the idea that a sovereign wealth fund could get into the mix? Overseas investors have been on a spending spree lately, taking advantage of the plummeting dollar. Last May, China’s fund put $3 billion into Blackstone Group (BX); in November Abu Dhabi put $622 million into Advanced Micro Devices (AMD) and $7.5 billion into Citigroup (C). But those numbers are still far short of Microsoft’s $40 billion offer.
Microsoft’s antitrust problem
A $41 billion marriage of Microsoft and Yahoo would create a powerhouse with dominance in e-mail and instant messaging and an opportunity to link those online features into the Windows operating system.
Putting Microsoft and Yahoo together: Some pieces won’t fit
With Microsoft’s surprise $45 billion bid for Yahoo, a lot of people are talking about why the deal makes sense. The combined advertising networks and Internet plumbing, for example, would do a lot to help MicroHoo challenge Google (GOOG).
And those reasons might be enough reason to do the deal. In Microsoft (MSFT) CEO Steve Ballmer’s letter to Yahoo’s (YHOO) board, he emphasized how size would benefit a combined company. “While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence,” Ballmer said. “Together, Microsoft and Yahoo can offer a credible alternative for consumers, advertisers, and publishers.”
But there are lots of other pieces in the two companies’ offerings that don’t fit well at all. And some of those could cause major indigestion as Microsoft tries to get a deal done. Among the trouble spots:
What if Google misses?
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Tech stocks have had a wild ride so far in January, with the Nasdaq swooning dangerously close to bear-market territory. But it could get even wilder when Google weighs in on Thursday.
That’s because Google (GOOG) was a darling of the tech run-up that effectively ended in November. Like Apple (AAPL), Google inspired hope that its strong brand and innovative technology can thrive in a downturn. So just as Apple’s disappointing earnings projections spooked Wall Street, if Google delivers a surprise — negative or positive — it could send shock waves across the industry.
Unlike Apple, Google will at least have a lower bar to clear when it reports earnings. Investors fear Google’s growth will be hindered by a global economic slowdown, so its valuation has already been punished along with Research in Motion (RIMM), VMware (VMW) and other high-growth tech stocks. Google’s shares have dropped 25 percent from its mid-day high of $747, which it reached 12 weeks ago.
Apple’s $18 billion shopping spree?
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| Mint CEO Aaron Patzer isn’t itching to sell his online budgeting service, but a company like Microsoft would do well to buy it anyway. |
No one’s said much about it, but there it was, plain as day, in Apple’s (AAPL) earnings call this week: Chief Financial Officer Peter Oppenheimer said the ‘A’ word.
Acquisitions.
When an analyst asked what Apple would do with more than $18 billion in cash it’s sitting on, Oppenheimer downplayed the possibility of a major stock buyback, and hinted that Apple could go shopping instead. “Our preference,” he said, “continues to be to maintain a strong balance sheet in order to preserve our flexibility to make strategic investments and/or acquisitions.”
Which is a fine segue to my piece in the latest issue of Fortune, which seeks to tackle the issue of what, exactly, Apple and others should do with their growing stacks of Benjamins. Among my recommendations: Apple should buy a green startup, Microsoft (MSFT) should buy Mint, and Google (GOOG) should buy TiVo (TIVO).
Though Apple normally doesn’t buy many companies, I suggest 2008 might be a good time for Jobs & Co. to throw some money around. (Same goes for Microsoft and Google, which do a lot more spending than Apple.)
From Microsoft’s lofty perch, no sign of a slowdown
Hoping that Microsoft would clarify how a spending slowdown might hurt the tech industry? Then you were out of luck Thursday.
When the software giant offered its strong earnings numbers, it had nothing but happy news to offer. Thanks largely to stronger-than-expected global PC sales, Microsoft (MSFT) reported $6.48 billion in profit for the holiday quarter on sales of $16.37 billion, beating analyst estimates.
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