So apparently the Yahoo brass didn’t take Microsoft’s public offer to buy them as well as could be expected (hey, at least their shareholders finally got a break – the stock jumped nearly 1/3 on Friday). They’ve been working all weekend (I suspect they canceled their Super Bowl tickets last minute) to find someone, anyone, to make a competing offer. Barring that, they just want to try to increase the offer, from the current $31/share to at least, according to a Yahoo insider, to $35-$40/share.
But the fact is, a perfect storm of factors is going to lead to a Microsoft takeover of Yahoo in the very near future, perhaps without any price increase over the original offer. The debt crisis means raising meaningful amounts of debt to leverage the transaction is impossible (the largest debt financed transactions in the recent past were in the $4 billion range, not nearly enough to do this deal). And Yahoo continues to spiral downward financially, making potential buyers leery of buying a dog. The fact is, the deal makes sense for Microsoft. It may not make sense for anyone else.
All that realistically stands in the way are government vetoes of the deal (DOJ review under Hart-Scott-Rodino and related European Union regulations). Or, perhaps, a slim chance for a certain White Night to appear and save the day. Former Yahoo COO Dan Rosensweig, who left Yahoo in late 2006, is rumored to be working to put together a complicated deal that involves both NBC Universal and Facebook. More on that below.
For my thoughts on why the Microsoft deal makes sense, see my comments on Fox Business earlier last week before the deal was announced (starts about the 3:30 mark). In that segment I say Yahoo will either need to partner with Google on search advertising or get sold off to Microsoft or someone else. Looks like Yahoo is now considering that Google deal. “Citigroup Global Markets analyst Mark Mahaney in a Friday research note estimated that Yahoo could boost its cash flow more than 25% annually by outsourcing all its search advertising to Google,” says the WSJ.
Here’s a list of Yahoo’s potential options. All of these are rumors, some make more sense than others.
News Corp. was scrambling to put together a deal on Friday and submit a competing bid. No takers, according to the private equity guys we spoke to, and it’s unclear that they’ll really want the asset after they’ve taken the weekend to consider it. For now, count News Corp. out of the race, although if Yahoo gets sold off in pieces, they’ll be likely bidders for some of the assets.
As a $118 billion company, they have the market cap to make this deal happen. But Apple hasn’t bought a company since 2002, and it’s unlikely they see Yahoo as a prize. People would love this deal, but it isn’t going to happen.
Pure Private Equity
Private equity shops are falling into two camps this weekend. A few are mulling around the idea of an offer, but the debt market keeps getting in their way. The rest are simply trying to figure out if a competing bid of any kind is likely to surface on Monday, so that they can trade the stock for a profit. A handful of them have called me out of the blue today to explore the News Corp. bid. None of them see a private equity bid as realistic.
Yahoo and eBay have been long time sweethearts – a Yahoo acquisition of the company in March 2000 was killed moments before being publicly announced over last minute details derailed it (cultural stuff, we hear). At the time, thought, eBay was worth just $20 billion or so to Yahoo’s $70 billion. Today, the companies are about the same size at just under $40 billion each. eBay has the market cap (just) to enter a bid and remain the controlling entity. But they are a company in transition, and have their own problems with growth. Their long time CEO is stepping down. It’s unlikely eBay will step into the ring.
Soverign Equity Funds
China, Norway and some Middle-Eastern nations have large enough sovereign equity funds to make an all-cash bid for Yahoo. But why would they?
Dan Rosensweig, The White Knight?
Dan Rosensweig left Yahoo as COO in late 2006, and has since joined Quadrangle Group, a large private equity shop. He has the motive to make a deal happen (to return triumphantly to Yahoo), and some of the tools (large amounts of money at his disposal). But the debt crisis affects him as much as the other private equity firms looking at the deal.
But this is where it gets interesting. From what we’re hearing, a plan is being considered that sells off Yahoo’s media assets to NBC Universal (Music, TC, Sports, Finance, Entertainment, OMG, food, health, etc. – everything except Video). What remains – Yahoo’s core search and advertising assets – would be packaged up and merged with Facebook. Yep, Facebook. That would likely result in Facebook becoming a public entity in the very near future.
The deal is creative as hell but would be difficult to sell to Yahoo shareholders, who understand the value of Microsoft stock but not Facebook’s. Breaking Yahoo up and selling it in pieces also means a non-tax-free deal, which makes it less attractive than what Microsoft is offering. I’d love to see Rosensweig try to quarterback this deal, or something similar, but there are too many hurdles.
Game Is Over
The Super Bowl isn’t the only game winding its way to an inevitable conclusion today. It’s become more and more clear that a competitive offer will be coming this week. And even if it does, Microsoft will likely just increase their bid. Yahoo’s destiny seems determined – to become an operating subsidiary of Microsoft Corporation.