Remember Yahoo’s boneheaded refusal of that excellent takeover offer from Microsoft? So do we. We also remember how our shares in the company immediately plummeted from $30 to $10 when Yahoo finally blew the deal and Microsoft walked away.
If Yahoo doesn’t get its act together and get its shares back to the buyout price it sniffed at last summer, this will go down as one of the most colossal mistakes in corporate history (AOL – Time Warner being in a different league).
All that said…
In recent months, the sentiment around Yahoo has turned so negative that observers have suggested that Yahoo should give its search business to Microsoft at any price and then shrivel up into the fetal position until its stock goes to, say, $5.
Well, screw that.
In the past six months, several things have happened that tilt the balance of Yahoo-Microsoft power back toward Yahoo:
- New CEO. Carol Bartz could turn this puppy around. (Is that guaranteed? Of course not. But it’s a distinct possibility.)
- stabilisation of search share. This is huge. In the past six months, Yahoo has stopped losing share to Google. It is holding comfortably to 20% of the US market, and over the past few months, its share has actually ticked up. Yahoo has more than twice the search share of Microsoft, which is spending countless billions trying to grab every basis point it can. In our opinion, the ONLY way Microsoft has a chance to succeed in the search market is to combine with Yahoo or have Yahoo self-destruct. The self-destruction possibility seems less likely than it once did.
- Another six months of Microsoft Internet futility. Last summer, Microsoft had been struggling to succeed online for 13 years, and it had only managed to run a distant third. Now it has been struggling for 13 and a half years. The company’s Internet branding, strategy, and organisation is in its usual chaotic disarray. Perhaps the new search head, stolen from Yahoo, can cut through the bureaucracy and fix everything. After 13.5 years of a lot of talent and money being thrown at this problem, however, we wouldn’t hold our breath.
- Steve Ballmer has finally admitted that Microsoft faces long odds in the search business. He just said that, this morning, on Microsoft’s strategic update call. That’s a big admission. Steve doesn’t back down from a challenge lightly, and he isn’t often cowed by long odds. To us, that sounded like an appeal to Carol Bartz to please, PLEASE engage in a conversation so Microsoft can find a way out of this box. But Carol Bartz, it appears, has realised that she has the upper hand, and is not yet responding.
Put all this together, and Yahoo is back in the driver’s seat in this power dance. Combining the two companies’ search businesses still makes strategic sense…but only if Microsoft pays up to do it.
Microsoft is the one that absolutely has to do a deal here, not Yahoo. And as long as Yahoo can continue to cling to its 20% share of the search market, that’s not going to change.