The UK’s Times Online is reporting that “Microsoft is in talks to acquire Yahoo’s online search business for $20 billion.” The report is filled with lots of juicy, specific details that lend it credence, but don’t make a lot of sense when you drill down into them.
The new deal, according to the Times Online, is a complex transaction that involves Microsoft supporting a new management team made up of former AOL CEO Jonathan Miller and former Fox Interactive Media president Ross Levinsohn, who are investing partners at Velocity Interactive Group. Levinsohn, however, tells VentureBeat there is “no truth” to the story. (Although there were rumors a while back that Microsoft wanted Levinsohn and Miller to run Yahoo, which is where this might be coming from).
And unlike Microsoft’s earlier offer to buy Yahoo’s search business outright, this one is for a long-term operating agreement. In fact, the $20 billion deal that sells the story in the headline is a red herring that refers to a call option that is part of the supposed deal. Here is how the story actually describes the supposed terms of the deal:
Under the terms of the proposed transaction, Microsoft would provide a $5 billion facility to the Miller and Levinsohn management team. The duo would raise an additional $5 billion from external investors.
This cash would be used to buy convertible preference shares and warrants which would give it a holding in excess of 30% of Yahoo.
The external investors would also have the right to appoint three of Yahoo’s 11 board directors. The talks with Yahoo involve Microsoft obtaining a 10-year operating agreement to manage the search business. It would also receive a two-year call option to buy the search business for $20 billion. That would leave Yahoo to run its own e-mail, messaging, and content services.
It is expected that the operating agreement would boost Yahoo’s income by as much as $2 billion per annum.
So the deal is really that Microsoft would put up $5 billion to help a new management team buy preferred shares and warrants that would give it a 30% stake in Yahoo. In return, Microsoft would get a 10-year operating agreement to run Yahoo’s search business.
Let’s just compare this to the deal Microsoft previously offered to buy Yahoo’s search business outright.
That involved an $8 billion direct investment in Yahoo in exchange for 16% of the company, plus $1 billion in cash for the search business. And that was expected to generate an extra $1 billion in operating income.
So how does the new deal generate twice as much income going into an economic downturn? And why would Microsoft agree to anything other than complete ownership of Yahoo’s search business? And how does the search business go from being worth $1 billion earlier this year to $20 billion in two years?
Like I said, it doesn’t make much sense.