Sifting the ashes of Microhoo

Ballmer says the deal is dead, and that a threatened strategic partnership with Google (Goohoo?), acting as a poison pill, is what killed it.

Ballmer’s letter could drive down Yahoo’s price, heat up shareholder actions, and drive Yahoo into MS’s arms. The WSJ cites “people close to” MS as saying that won’t happen, but then hedges by noting that Ballmer’s letter is “a typical tactic for a would-be acquirer hoping to spur shareholder activism and one followed [successfully] by Oracle Corp. last year in its bid for BEA Systems Inc.”

I have a few thoughts.

First, would the suit against Yahoo’s “poison pill” work? I doubt it. Time is on Yahoo's side – it was still negotiating to increase shareholder value and had not sold control.

Second, if Yahoo stock does take a beating and Ballmer does come back, could he and MS be sued for securities fraud – making a deliberately false threat to produce this result? Possibly under 14(e) and 10b-5, but very hard to prove.

Third, how do the shareholders feel about all this? This case is an interesting basis for ruminating on the state of corporate ownership today. The same firms own both companies to a significant extent: “90 percent of all Yahoo institutional investors also own shares in Microsoft.” (HT Bainbridge). Many may have been perfectly hedged. Not all, of course. Some were speculating on an outcome, perhaps with bits of non-public information. According to the WSJ, “[a]nalysts have estimated that Yahoo shares would fall to the range of $20 to $25.” Since Yahoo was at $28.67 late Friday, compared with prices being discussed in the mid-thirties and higher, the market was reflecting significant risk in the deal. Indeed, while Ballmer’s letter surprised the market, the high end of the expected range really isn’t all that far from where it was before the letter. Could be the market saw the same risks that Ballmer did.

Finally, what will happen now? I think (with Gordon) that it's far from clear MS will give up. As I pointed out several months ago about the Microhoo deal: "today’s megafirm differs from that of a previous era. Now it’s about scale economies of marketing rather than of making products." If MS wants to continue to be a megafirm, as it surely does, it has to deliver lots of eyes – more than Google. There may be a tipping point at which sheer size delivers a significant competitive edge. MS may conclude that only Yahoo deal has a chance of stopping Google hegemony. If so, it needs Yahoo at any price -- which is what Yang may have been thinking.

Yet I also wondered several months ago whether “only a combination, and not contracting, could yield these economies given the risk of opportunism by contracting parties.” The potential Goohoo strategic partnership indicates that merging is not the only way. Of course the antitrust laws might have something to say about Google buying Yahoo. (Maybe an antitrust guru could tell me about the risks in the strategic partnership.)

If MS does go for another deal, would Facebook be a possibility? A privately held company may be looking to Microsoft like a nice simple option at that this point, a la Mars and Wrigley. This deal could create a big payday for the Facebook managers without the mess and legal peril (SOX, 33 Act) of a public offering.

It does seem that the future of the Web is being shaped in a couple of boardrooms right now.