Saturday, May 03, 2008

Microsoft unshackles itself from Yahoo... yahoo!

I think the Yahoo acquisition really could have worked out well for all parties (other than Google), but I always saw it as an accelerator for Microsoft rather than a survival requirement for the online and ad-based business space. Microsoft has a boatload of great technology, including online content and content delivery infrastructure, online advertising infrastructure, and the Microsoft Live Search engine is very respectable technology. Sure, Yahoo would have been a feather in Microsoft's cap, but Yahoo was never do-or-die for Microsoft. I was never a great fan of the deal, but I always felt that it made a lot of sense and would be a good deal for Microsoft. And a good deal for me since I own a fair amount of Microsoft stock. But now that Microsoft has officially withdrawn the acquisition offer, I am very relieved. Read the "Press Release: Microsoft Withdraws Proposal to Acquire Yahoo! (May 3, 2008)." I really do believe that Microsoft has all the right building blocks in place and with many more to follow. They do need to be a bit more patient with getting people over to their search engine, but they have the money in the bank to be as patient as necessary. And the Microsoft search technology really is a lot better than many people give it credit for. I think Yahoo has enough market share and technology to continue to limp along and succeed in their own way, but that is actually a good thing for Microsoft as its medium-term goal is to become #2 in the space, which is easier as Yahoo continues limping.

Some people may believe that the "loss" of Yahoo is a really bad thing for Microsoft and "dooms" the company against Google, but I think I lot of people were already feeling that the integration cost was maybe just as big a risk for Microsoft. I think that the stock market will view this as a big positive for Microsoft stock. OTOH, I do not care how the stock market reacts in the coming week or two, since I am more of a long-term investor.

Again, I am quite relieved and even thrilled that Microsoft has unshackled itself from such a potential albatross of a deal. There are plenty of smaller fish in the online sea for Microsoft to feast on. The elimination of the integration distraction alone should send spirits soaring at Microsoft. I wish them all the best in refocusing on how to push their online services infrastructure ahead of Yahoo and into being a more formidable competitor to Google.

I had been particularly bothered by the fact that the deal would have left Microsoft with very little cash or maybe some debt as well. Of course Microsoft does not need as much cash as it has, but to draw it down to near zero did not make a lot of sense to me. In fact, that may have been the argument in favor of refraining from upping the deal price to $37 per share. I could have lived with the extra $5 billion deal price that Microsoft was offering today, but Yahoo was simply being too greedy for me to personally stomach.

The really good news for Microsoft shareholders is that now the company can once again be aggressively buying back stock.

The $64 billion dollar question (almost literally) is whether Microsoft stock could pop back up to the $35 range in the days ahead. I think there is an excellent chance, but the stock market is rather uneven and temperamental these days, so it is also quite possible that "investors" could dump on Microsoft for this latest "failure." I am not placing any bets, but I do intend to keep my current positions in Microsoft Stock.

Imagine the absolute agony now being experienced by Yahoo shareholders who now have over 36 hours to contemplate what wrath traders and speculators will inflict on Yahoo stock at the opening bell on Monday. One word: ouch. Of course, as I said, it is very difficult to predict the markets these days, so the withdrawal of the Microsoft offer could cause some other even better opportunity to pop up for Yahoo and its beleaguered shareholders.

In short, good riddance to the Microsoft-Yahoo "deal."

-- Jack Krupansky

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