Sunday, May 4, 2008

Is Monkey Boy F'ing Himself?

Reports have it that Microsoft CEO Steve Ballmer and Yahoo CEO Jerry Yang sat across the table from each other engaged in a ridiculously high stakes poker game. Ballmer offered $33 per share (or $47.5 billion). Yang counteroffered $37 per share ($53.3 billion). What's $5.8 billion between friends? Seriously, they were only about 10% apart. I'm sure Yang expected Ballmer to offer to split the difference at an even $50 billion, they'd shake hands and send out a joint press release announcing the sale of Yahoo. But it didn't go down that way. Monkey Boy was being pressed hard by Yang and he didn't like it. Ballmer told Yang to go fish. Actually, I highly suspect (but have no proof) he told Yang to perform a metaphysically impossible act on himself, the same act VP Cheney suggested Sen. Leahy perform on himself. Ballmer then pulled Microsoft's offer and went home. Link.

Microsoft previously threatened to launch a hostile proxy fight to wrestle control of the Yahoo board from Yang; however, they've abandoned that idea. Its occurred to Ballmer that before they even get the proxy war troops geared up, Yang drops a poison pill on Microsoft's head spoiling the fight. On to the larger question, was it smart for Ballmer to walk away from Yahoo at $50 billion? I haven't really dug into the financial valuation question regarding Yahoo's stock at present but, really, it doesn't matter. In my opinion, Microsoft has to pay. Forget the theoretical valuations.

Up a Creek
Microsoft has backed its guerrilla sized ass into a corner. For years they pretended the web didn't exist, it was a PC universe up in Redmond. When Netscape's browser was a huge hit enabling an explosion in web traffic, Microsoft simply purchased the next best browser out there and started giving it away (thereby killing Netscape). Problem solved, right? Microsoft went back to its desktop world. Then came the web portals and web search engines such as Yahoo and Altavista. Again Microsoft snoozed. I'm sure they figured they would get around to crushing these pesky net companies if and when they posed a threat to Microsoft's software business. What do search engines and portals have to do with software anyway? Microsoft formed a half-ass search engine of its own and basically carried on business as usual.

Fast forward to Google. At first, they are just a bunch of computer science geeks who build a better search engine mouse trap. No skin off Microsoft's nose so far. The game changer actually came from Yahoo when they acquired Overture (formerly, Instead of the silly, fragmented banner ad market of before, Overture created a pay-for-placement text ad market that worked on both search engine results and contextually inside a network of web sites. This business model signaled the coming of age of internet advertising. Big money started pouring into web search and content key word advertising. Google, ever the better mouse trap guys, took the Overture model and improved it. The advertiser interface on the old Overture site was set up for mom and pop players. It was cumbersome for large scale ad campaigns. Google cleaned that up and made one other smart move: amalgamation of the millions of small web site publishers into the the Google ad network by cutting them a reasonable slice of the revenue pie. The small publishers flocked to Google in exchange for the best revenue return in the industry. Google Adsense was an unparalleled hit in the web advertising world.

Now Google is a monster company with a bazillion $ market cap. Too big for Microsoft to kill or eat. Trouble. Microsoft starting pushing back. They used their monopoly on the desktop and started integrating search into all their desktop applications. Given Microsoft's market power on the desktop, its no small issue for Google. That's when Google decided to invade the desktop. They created a utility designed to run on the desktop that searches the files on your PC or MAC in the same fashion as Google search. But the next shots from Google were heavy caliber. Realizing that in the current internet age, applications can run on the web just as easily as they run on the desktop, Google created business suite software directly competitive with Microsoft's office suite: see Google Docs, Google Calendar and Google Spread Sheets. Google is giving these products away for free. Can you say Netscape? Yes, Microsoft is getting baffoed up the rear by Google just as it had done to Netscape decades before. Certainly, Google's online business apps have a long way to go. They're not yet in the league with Microsoft Office. But do you want to bet against the billion dollar better mouse trap guys? I have complete faith Google will continue to upgrade it's online business suite.

So What's That Got To Do With Yahoo? -- Squeezing Ballmer's Testicles
Were we talking about Yahoo? Oh yeah, back to Ballmer and Yang. Here's what's going on. With Google's phallus in his rear end, Ballmer finally realizes Microsoft needs to be a heavy weight in the web world. Software now runs across platforms (desktop and online being but two). Google search, at its core, is a piece of online software. The software jungle can only hold so many behemoths and behemoths navigating within a confined space inevitably run into each other. Microsoft is currently king in the corporate software market. Google is king in the search / online advertising market. Google is invading Microsoft's primary market, therefore, Microsoft is compelled to conterattack. Therein lies the problem.

Yahoo is #2 in search. If Microsoft punts on Yahoo, there is no fallback option. MSN is #3, / AOL fall in a very, very distant 4th and 5th. Even collectively, and AOL are not pimples on Google's butt. Because Microsoft delayed so long in getting serious about the web, there are basically only two courses of action open to it: (a) pay an exorbitant price for Yahoo or (b) cede the web market to Google. Yang is no dummy. He knows the score and, like a smart businessman, is squeezing Ballmer's testicles.

From his end, Ballmer knows it's a tough market out there. Yang has told his shareholders that the Microsoft market is below value. Now wall street will crank up the pressure on Yang to ramp up earnings thereby justifying spurring an offer carrying a significant premium offer current market cap calculated by today's trading price. If Yang doesn't start turning earnings around, the street will punish Yahoo's stock price. There is also potential for a cascade of stockholder derivative suits against Yahoo if the stock price craters. Is Ballmer waiting on the sidelines hoping the street ratchets up pressure on Yahoo thereby improving his hand? For his sake, I hope not.

Could Ballmer's Play Backfire?
Do Catholic priests screw alterboys? Hell yes, it could backfire. So Yang has to ramp up profits. He'll be grasping at any life raft within reach. What's a quick and easy fix? Google commands a higher per click ad rate from advertisers than Yahoo. What if Yahoo moves some of it's ad traffic over to Google to avail itself of the higher ad rate? Bingo, instant kick to profits. Those talks have already heated up. My personal opinion is that Yahoo has no option left other than to partner with Google, making Google even more ginormous in the web advertising world.

Monkey Boy, don't take it personal. You really are making a foolish move by not kicking in the extra $5 billion for Yahoo. I don't care if its extortion. That's the price for Microsoft's past sin in being complacent about the web advertising market. Pay the ransom and move on.

For those wondering about Steve Ballmer's nickname of Monkey Boy, wonder no further. Here is the genesis.


jjray said...

Looks like Carl Icahn is doing his best to rescue Monkey Boy.

jjray said...

Congrats Monkey Boy. Your game plan has come off to perfection ... Yahoo is now in the arms of Google.

jjray said...

Monkey Boy may come out of this thing smelling like a rose with all the egg landing on the Yangster's face instead. DOJ stepped in to block the joint Yahoo - Google text ad deal. I thought a compromise would be found but it now appears like DOJ won't budge and the joint venture will fall through--

That means Yahoo is left holding a bag of manure. I see no other option than for Yahoo to oust Jerry Yang as CEO then go back to Microsoft, hat in hand. The whole rationale for spurning Microsoft was to generate added revenue through partnership with Google. Now that antitrust concerns have derailed the Google partnership, Microsoft is the only viable partner for Yahoo. And Yang already pissed in that well so Yang has to go if a deal is to be struck with Microsoft.