microsoft right to walk from yahoo

Posted on May 7, 2008

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Pundits can deride Microsoft for walking away from the hostile Yahoo takeover deal as much as they want, but Microsoft can heave a sigh of relief for dodging a bullet.

No, Steve Ballmer was not being all hat and no cattle, as some have labeled his action for withdrawing from the attempt to buy Yahoo after a three-month wrangle.

In the end, it was a smart move by Ballmer and the people at Microsoft.

AP photo

Basically, he listened to his shareholders and his people, who thought it was dumb to pay $47.5 billion for a second-rate also-ran company that did not know a good deal when it hit it in the face, and furthermore let its pride get in the way of its prospects. The fact that Microsoft’s stock declined on news of the unsolicited takeover offer should have been reason enough to convince Ballmer that investors did not think that the proposed deal was a good idea at all. It was a good thing that he pulled out before more damage could be done to Microsoft.

Talk about cheek. Yahoo was trading at an anemic under-$20 a share before Microsoft surprised the industry with its takeover offer in late January, boosting Yahoo’s share price to the high $20s thereafter.

At Microsoft’s $33 a share offer, Yahoo’s shareholders should be busy hiding its glee and just take the money. Instead, it stubbornly clung to the notion that its shares were “undervalued” by Microsoft’s offer and won’t stand for anything less than $37 a share.

Fat chance. Yahoo’s shares had not seen those heights in two years. On what basis would Microsoft justify paying that kind of money for Yahoo to its shareholders?

Yahoo co-founder Jerry Yang might have been playing chicken, in the hope that Microsoft would blink first and give them a few more dollars per share.

But Yang instead gave Ballmer the out that he was looking for to kill the ill-fated deal.

Now Yang and Yahoo’s board could face a flurry of investors’ suits, at their fury of Yahoo’s folly for rejecting the best deal it could have been offered.

Microsoft should just let this go and forget about going back to the table with Yahoo, despite rumors that this isn’t yet completely finished.

With the $47.5 billion price tag it was willing to pay, Microsoft should look to score a game-changing partnership, not one that would still play a distant second fiddle to Google. It really does not make sense to spend that massive kind of money buying a company that will not have the ability to knock Microsoft’s ultimate enemy out. Remember — eyes on the prize. If it has that kind of war chest to throw around, Microsoft should reach higher and get a truly innovative company or partnership that could break new ground or change the rules of the internet game.

Or it could use that kind of money on research and trend-spotting to get onto the next big wave in internet advertising, internet search or other kinds of networking trend. Microsoft is pretty unique among big technology firms for its substantial cash hoard and just think of the kind of innovations it could come up with, should the money be invested in the appropriate research and development.

Microsoft seems to be pursuing that approach now. Its chairman Bill Gates has just said the company is looking to go down an independent path. “We will make the advances that give people a great choice there,” he said, referring to internet search offering.

Microsoft does need to innovate to beat Google, which dominates internet advertising and search. But partnering Yahoo would not be the way to defeat Google. Microsoft would be better off going it alone, or finding a partner truly worthy of taking on Google. And Microsoft should hang on to its billions until the right deal and the company worth battling for comes along.

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