Thursday, May 08, 2008

Microsoft Drops Its Pursuit of Yahoo

By now, you've probably read an armload of articles about Steve Ballmer's retraction of Microsoft's offer to buy Yahoo.

As I wrote in this post,

"Not that I'm a Microsoft shareholder. It hasn't been in my equity portfolio for nearly a decade.

But Ballmer made some sense in that he has acknowledged his own firm's risk in integrating Yahoo. Citing internal reasons for not increasing Microsoft's bid for Yahoo, the CEO gave shareholders some reason for sanity in the looming hostile phase of the firm's quest for the ailing internet portal player.

As miserably as Microsoft has performed for years, it will probably only do worse as it attempts to do several new things: integrate a large acquisition, deal with various staffing exits and other related issues, and then have to actually make good on the promise that the Yahoo acquisition will somehow solve all of the firm's ills."

How ironic, as I told my partner, that Jerry Yang wasn't paid for the value he saved Microsoft's shareholders with his obstinacy. Who knows how much Microsoft shareholder value would have been destroyed as Ballmer and his team tried to integrate Yahoo's mediocre platforms and organizations with its own?

Instead, Yang is now justifiably in hot water with his own shareholders for screwing them out of a nice exit premium, as portrayed in the nearby Yahoo-sourced price chart for the firm, Microsoft and the S&P500 Index over the past six months.
Yahoo's price, depicted by the blue curve, soared on Microsoft's offer, but has now declined from its post-offer high.
Microsoft has steadily declined over the period, except for a brief pop a few weeks ago, when the rumors swirled that it might not pursue the deal. But even that rise has since evaporated.
So we are left where we started- two internet also-rans unable to prosper alone, or together. And Google having sagely played a gambit to poison the acquisition, without actually spending any significant money to do so, as it courted Yahoo with potential liason.
The Wall Street Journal published an editorial this week by Andy Kessler concerning the aborted acquisition. In the piece, Kessler argued that the internet is still wide open, and Microsoft has plenty of smart people and money with which it can push into new areas of success.
As I've written in prior posts about Microsoft, I think this is both unlikely and wrong. Microsoft's era as a firm which earn consistently superior total returns for its shareholders is over. It's time to split the company into several pieces- probably online, operating systems, desktop applications, and gaming. Each piece will likely have very disparate futures after being cast off from the smothering influence of the corporate umbrella.
It's not only unlikely that a Microsoft which remains substantially what it is today will return to consistently superior total return performance. Retaining its cash hoard to spend on new initiatives, in my opinion, is unfair and constitutes improper fiduciary behavior on the part of Microsoft's board and senior management.
Its time in the sun is past. Better to dividend the cash to shareholders, split the firm up into its logical pieces, and toast a once-great software technology icon.

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