Filed under: Google (GOOG), Microsoft (MSFT), Time Warner (TWX), News Corp’B’ (NWS)
This morning’s papers are full of news about various combinations of Yahoo! Inc. (NASDAQ: YHOO) with other companies. The New York Times reports that there are a few new options in addition to the $44.6 billion Microsoft Corp. (NASDAQ: MSFT)-Yahoo deal, which may be designed to get Yahoo a higher bid:
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Microsoft-News Corp. (NYSE: NWS)-Yahoo. Under this deal Microsoft and Murdoch would team up to create a combination of Yahoo, Microsoft’s MSN and News Corp’s MySpace;
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Time Warner Inc. (NYSE: TWX) (BloggingStocks‘ parent)-Yahoo. Bloomberg News reports that this deal would combine AOL and Yahoo — specifically Yahoo would gain control of AOL, receive an investment from Time Warner, and give up a 20% stake in the combined entity. And Yahoo would repurchase several billion of its shares in the mid-$30 range; and
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Google Inc. (NASDAQ: GOOG)-Yahoo. This is an older idea — outsourcing Yahoo’s search advertising system to Google. But the two began a two-week test in which Yahoo will use Google’s search advertising system to deliver ads that appear alongside Yahoo’s search results. The test will involve searches conducted in the U.S. on Yahoo.com and will pertain to no more than 3% of all search queries.
How should Yahoo’s board think about what to do? This is the question I posed my students for their mid-term paper in my course on Strategic Decision Making. The students handed in their papers a month ago, before all these new developments. But in my view, Yahoo’s board should evaluate the options based on their pros and cons from three perspectives:
- Shareholders. This is a pretty obvious factor to consider but it’s surprisingly difficult to evaluate. If Yahoo goes with the highest bidder, shareholders need to consider the bid differently depending on whether it’s for cash or stock. A cash bid should be analyzed based on the after-tax proceeds whereas a stock bid involves making forecasts about future cash flows which will determine the value of those shares in the future.
- Employees. In a high tech company, employees are the ones who create the future. So the board needs to consider which of the options will leave the combined company with the best employees to compete in the markets that it’s targeting for future growth. It’s difficult to compare quickly the quality of the teams that would result from the various options. But that’s why they get paid the big bucks.
- Customers. Ultimately, it’s all about which option will create the most value for customers. And the combined company is likely to have different sets of customers with different needs. Advertisers will be looking for which technologies give them the greatest return on their advertising investment. Web users will prefer the option that gives them the most useful content.
Not enough is yet known about the options to assess them along these lines. My hunch is that the Microsoft-News Corp. option would lead to a raised bid, resulting in the best outcome for Yahoo shareholders. But I question whether the integration of these businesses could be managed effectively — this could lead to employee losses and opportunity for Google to take market share by exploiting the internal confusion.
I expect more details to emerge in the next few weeks. But now the game is on. I hope Yahoo’s board picks the deal that makes shareholders, employees and customers better off.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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