“Did we want to do the deal? Yes!”
This case is based on adapted highlights from date-consecutive articles about Yahoo! by the following journalists, in The Times, The Sunday Times and Times Online:
Suzy Jagger and Mike Harvey, along with Murad Ahmed, Amanda Andrews, Holden Frith, Jonathan Richards, Dominic Rushe , Dan Sabbagh, Christine Seib, Susan Thompson, ‘Tempus’ and John Waples
Jerry Yang was doing a PhD at Stanford when he and fellow-student, David Filo, created a website directory. In 1984, they founded 'Jerry and David's Guide to the World Wide Web', renamed Yahoo! in 1985.
Terry Semel, Yahoo!’s former executive chairman, calls Yang Yahoo!’s " heart and soul.” Yang was ‘Chief Yahoo’ until he succeeded Semel as CEO. Yang says: "Yahoo! is in the midst of transformation…It's imperative we execute with speed, clarity and discipline."
"You couldn't get an outsider to understand the company better than Yang," said one Yahoo! executive.
Yang has rebuffed a bid from Microsoft that valued Yahoo! at 66 times last year’s net earnings. On January 31st, Microsoft offered $42bn, $31 a share. Yang is optimistic about organic growth. In reality, to fend off Microsoft, Yahoo! needs external growth. In an e-mail to staff, Yang emphasised the $2bn spent on acquisitions and controlling stakes in joint ventures in the last two years and stressed the value in the brand, with 500m worldwide users. He spotlighted double-digit improvement in 2009 cashflow. His promises are ‘jam tomorrow’. 2008 will be bad. Operating cashflow is forecast to decline in 2008 from $1.92bn last year to about $1.85bn.
Yahoo! hopes online advertising will rocket, from $45bn in 2007 to $75bn in 2010 but Yahoo! is lagging. It grew 8% last year and expects 9% this year. Google is gaining market share. Still, Microsoft’s bid, says Yang, is opportunistic. Although it places a 62% premium on Yahoo!, Yang says Microsoft struck when Yahoo! shares were at their lowest since 2003. Moreover, it may undervalue Yahoo!’s minority stakes in Alibaba and Yahoo!Japan, where its branded partner is market leader. Jeff Lindsay, an analyst at Sanford Bernstein, valued these at $17.6bn, equivalent to $13 of Yahoo!’s current $29.68 share price.
Yahoo! is keen on an alliance with AOL but this was played down yesterday by AOL’s parent, Time Warner. AOL owns Platform-A, the largest advertising network in the US, selling ‘display ad’ space across AOL's own sites. However, AOL's online advertising is not as lucrative as Google's or Yahoo!'s. AOL’s advertising revenue fell by 6% in the third quarter. On the ‘search-ad’ side, Yahoo!'s potential gains from an AOL acquisition are unclear. In that domain, Google is dominant.
Yahoo! says it would negotiate with Microsoft if it raises its bid. Yahoo!'s chairman, Roy Bostock, wrote an open letter after Microsoft threatened to launch a hostile bid within three weeks, unless Yahoo! negotiates. Yang has said that if Microsoft formally turns hostile, he would sell parts of Yahoo! to Google.
Bostock wrote that a successful bid must be "superior to other alternatives, and provide certainty of value and certainty of closing. We are open to … a transaction with Microsoft if it … fully recognises the value of Yahoo!" He said there had been some “constructive conversations”. He expressed surprise that Microsoft claimed Yahoo! “refused to negotiate” as Microsoft’s CEO had had two meetings with Yahoo! and “could have advanced discussions in any way”. He also said Microsoft had failed to provide “information we need to further our understanding of the regulatory issues associated with any transaction.”
Yahoo! has announced plans to test Google’s search advertising technology on some Yahoo! sites. It has agreed, for a two-week experiment, to outsource some US searches to Google, 3% of its web advertising. A broader long-term deal would boost Yahoo!’s cash flows, because Google’s...
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