Microsoft and Yahoo Need to Avoid the Lose-Lose Scenario

Rob Enderle

One of the things you learn reasonably early on in business life is that sending mail, particularly when you are upset, isn't a good idea. It doesn't matter how careful you think you are, the end result isn't going to be very productive. Threats, in particular, typically don't do anything but bring large grins to attorneys' faces and almost never make the sale of anything more likely.


Currently, both Microsoft and Yahoo are making their attorneys and Google much happier than they need to.


The Market Problem


Right now, the market is dropping, which makes any stock-based deal more difficult. The value of the company to the seller tends to stay static, while the value to the buyer and the currency (mostly stock) drops with the market.


Shifting to a cash-based deal would be better for the seller but, in a recessionary market when you want to increase liquidity, really bad for the buyer. In an increasing market, cash is easier but then stock becomes more attractive, which is why market stability is to be desired for most transactions.


In addition, much like it is in the home market right now, the sellers' idea of what their company is worth has little to do with where the market set the value for the company. The sellers sincerely believe Yahoo is worth more and would like Microsoft to raise its offer to something closer to what the company was worth some months back -- just like current home owners trying to sell their homes are setting prices based on where the market was, not where the market is.


Microsoft, the buyer, on the other hand, has bid substantially over the market value for Yahoo and can't understand why the sellers don't jump at the deal. Redmond is clearly getting frustrated with what it likely thinks is excess greed on Yahoo's part.


Were this a home, both parties would likely walk away very upset. The buyer would not get the home they wanted and the seller would watch the value of their property decline, in this case, catastrophically.


The No-Win Scenario


If you develop too much hostility between two companies during a takeover, the result for the buyer and seller will be ugly when the firms come together as the employees will not recognize the new leadership and significantly damage the merger effort. On the other hand, if the merger attempt fails, Yahoo stock will drop to near legendary lows. Then the market, particularly the institutional stockholders, will lose any remaining confidence with the board or the executive staff, making any future board or executive positions much harder for them to get.


This is the path to the no-win outcome for Yahoo; it won't matter which way this comes out -- it loses. For Microsoft, increasingly, the only win will be to walk away from this deal because the market should reward it for stepping away from a property that is increasingly viewed as damaged. But in stepping away, Microsoft at best will look foolish for having tried this in the first place and the executive staff be held up to ridicule for once again failing to mount a successful counter to Google. Looking foolish isn't exactly in the best interest of Microsoft's executive staff either.


What Needs to Happen


The threats need to stop; they're counterproductive to the process. If Microsoft is going to attempt a hostile takeover, it should simply move to execute that and focus on regaining the trust of the Yahoo employees.


Better, though, would be a meeting between the top executives from both companies in an informal setting to simply hear each other out. Right now, the two sides are very far apart; to close this deal in a friendly fashion, they need to find some middle ground. There may be something Microsoft would be willing to give in terms of assurances to Yahoo that would make that company's decision makers more comfortable. And Yahoo may be able to better explain in person why the price should be higher and what its needs are so that alternatives can be found and fleshed out.


In the end, both sides likely need to realize that on the current path either walking away or consummating the deal will be increasingly damaging to both companies. They need to find a mutual path that is beneficial and takes the smile off Google's face. This is something both firms would deeply like to do; the current fighting has the Google folks grinning from ear to ear, particularly with regard to what it is doing to Microsoft's image and Yahoo's ability to execute.


In short, it isn't Christmas. Giving Google a gift that keeps on giving is in neither firm's best interest and ensuring against that outcome should be both firms' primary focus.

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