Sources have indicated to us that Yahoo has scheduled a special board of directors meeting on Friday to determine, effectively, the fate of the company. After a week of hectic negotiating, it’s clear that no one is going to step in with a competing acquisition offer to what Microsoft put on the table last Friday – $31 per share. Softbank, the last real chance for a competing bid, bowed out today and said they would not be challenging the Microsoft offer.
There are only two options left. Accept the offer in principal, and try to increase the price with no negotiating leverage at all, or do a deal with Google to outsource search advertising and, likely, search itself.
The board, we’ve heard, is basically being told by outside advisors to take the Microsoft deal. But we’ve also heard that a contingent of senior executives at Yahoo, who are willing to do literally anything to thwart a Microsoft takeover, are pushing for the Google deal and will present their case at the meeting.
Based on our discussions with insiders and analysts this week, it’s fairly clear that the Google deal would, to say the least, not be a good choice for Yahoo in the long run. But Citigroup’s Mark Mahaney gives it a 25% chance of happening anyway, based largely on an emotional response from Yahoo to remain independent at all costs.
A Google Deal – Short Term Independence/Long Term Nightmare
If Yahoo were to outsource search to Google, the immediate upside would be 25% or so to Yahoo’s cash flow in the form of increased revenues (revenue per search query would likely jump to 9 cents from 4 cents today), and cost savings from operations (servers) and headcount reduction. That may add $7 billion or so in immediate valuation, or around $5 per share, say some experts we’ve talked to (less than half the premium Microsoft is offering).
Nearly a third of Yahoo employees would be shown the door, though. Estimates are that Yahoo employees 1,500 or so people in each of search, the search advertising platform, and advertising sales and operations. All of those employees would likely be fired, unless Yahoo chose to retain its core algorithmic search product. Experts say, however, that good search and the ad platform go hand in hand. Without data from the search advertising side of the business, search itself is hobbled. It’s likely, therefore, that Yahoo would shed all of those jobs to and simply outsource all of search and search marketing to Google. Yahoo has a little over 13,000 employees today (taking into account the recently announced layoffs) – so nearly 1 in every 3 would leave.
Those revenue estimates of 9 cents per search query, though, are based on current Google revenues. It’s likely that Yahoo could negotiate most of that for themselves to get the deal. But down the road, when it’s time to renew, Yahoo will have lost all of their leverage since there will be no one other than Google to partner with. Renewal deals won’t be so sweet.
It’s also likely that Yahoo would see a gradual decline in search volume if they were to outsource to Google (as has happened with AOL, which moved to Google search in 2002 and has dropped from 30% to less than 5% market share). Expect Yahoo to take the same hit over time.
There is also the strong likelihood that any deal reached between Yahoo and Google would be rejected by U.S. regulatory authorities. In the meantime, however, all the best Yahoo search employees will have left the company to take more stable jobs. In the event the deal was rejected, Yahoo would find itself in a nightmare, having lost scores or hundreds of its best employees and without the Google revenue. Sure they’d be independent, but their stock price could be a fraction of the $19 they saw the day before the Microsoft offer.
It’s fairly certain that Yahoo will continue to use the threat of a deal with Google to try to increase Microsoft’s offer a few dollars per share. But the threat isn’t (or at least, shouldn’t be) real, and both sides know it.
Get ready for Microsoft/Yahoo. It’s happening.