Now that Yahoo! and News Corp are discussing a MySpace+Cash for Equity swap, it’s time to analyse this idea. Would it be a Microsoft alternative? Would it be smart? Is it likely to happen? Yes, no, and no.
Unlike outsourcing-search-to-Google or merging-with-AOL, the MySpace deal would be a viable alternative to a Microsoft takeover. If Yahoo sold its stock at a high enough price (and bought MySpace at a low enough one), Yahoo shareholders might be persuaded that the MySpace combination would eventually produce more value for shareholders than a sale to Microsoft.
Yahoo buying MySpace at a $6 to $10 billion valuation would be a bad idea. (For Yahoo. It would be a GREAT idea for News Corp) Unless Yahoo sold its own stock at an exceptional price, therefore (in exchange for the cash portion of the swap), Yahoo would likely be paying too much for a troubled, stalling asset that has already proven hard to monetise.
A News Corp-Yahoo deal is not likely to happen for the same reason that another non-Microsoft competitive bid for Yahoo is not likely to happen: Because Microsoft won’t let it. The News Corp-Yahoo discussions have most likely been undertaken to create an alternative to a Microsoft deal–and, thus, force Microsoft’s bid up–rather than because Jerry or co think they’ll really come to fruition.
As reported, the swap would consist of:
MySpace and other Fox Interactive Media Assets ($6-$10 billion) + Cash ($5-$9 billion)
In exchange for
20%+ of the New Yahoo.
Positives of a MySpace-Yahoo Combo
Yahoo would emerge larger and better capitalised, with a strong position in social networking–an area in which it is currently weak. It would remain a stand-alone public company, which we think is a big advantage versus the Microsoft deal (stock options, more manageable size, less inter-division bureaucracy, etc). Lastly, it would have a lot more ad inventory (albeit of questionable value).These are fine positives. Unfortunately, they’re outweighed by the negatives.
Negatives of a MySpace-Yahoo Combo
MySpace has long since lost its momentum to Facebook, which will soon eclipse MySpace’s traffic on a global basis. MySpace’s competitive position is similar to Yahoo’s four or five years ago: industry-leader, but less innovative, slower growing, and ultimately less competitive than its upstart competitor. MySpace is to Facebook, in other words, as Yahoo was to Google. Putting the two weaker companies together won’t help them get more competitive.
MySpace has proven hard to monetise. Even Google can’t figure out how to do it. MySpace’s financial performance is heavily dependent on a deal that may be renewed on far worse terms within two years.
MySpace’s DNA is rooted the Los Angeles entertainment industry, not the Silicon Valley tech industry. Yahoo doesn’t need to lurch south toward Hollywood again–this is what got it in trouble last time. Yahoo needs to refresh its Valley roots, by once again becoming a hotbed of top-notch engineering talent. Facebook would be a better match (but Yahoo already passed on Facebook).
Rupert Murdoch is no dummy–and he’s selling MySpace at a good time. MySpace has lost a lot of ground over the past year, and we suspect this competitive erosion will continue. Rupert Murdoch has been hailed as a genius for picking MySpace up for a song. Yahoo investors should consider the possibility that he’s displaying similar acumen now.
Jerry Yang is no dummy, either, but he’s desperate. According to the WSJ, previous Yahoo-MySpace deal discussions have fallen apart based on price (thank goodness). At a $6-$10 billion reported valuation for MySpace, we suspect they should again fall apart based on price. We’re worried, however, that Jerry is so eager to save his baby (Yahoo), that he’ll embrace a deal he shouldn’t.
There is a price at which a Yahoo acquisition of MySpace would make sense, but $6-$10 billion probably isn’t it. So this leaves the cash piece of the deal.
If News Corp and the Mysterious Private Equity Firm (Quadrangle?) buy $5-$9 billion of newly issued stock from Yahoo at, say, $30 a share, then that might be interesting. Yahoo’s current shareholders would at least be benefitting from the price boost of Microsoft’s offer, and the company would emerge far better capitalised, with a $10 billion war chest.
But something tells us Rupert and the Mysterious Private Equity Firm aren’t going to rush to buy $5-$9 billion worth of stock at $30 that they could have had two weeks ago for $19. And we’re especially sceptical that they’re going to pay $35 for it, once Microsoft raises its bid.
So we think a News Corp-Yahoo deal is unlikely to happen and unlikely to sway Yahoo shareholders, who are now fixated on a $35 Microsoft deal.
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