Acquisitions, feature, top, yahoo, jerry yang, microsoft, steve ballmer

Why Yahoo's yearning for earnings produced no quick fix

The longer Microsoft's bid for Yahoo drags on, the more annoying it gets. Jerry Yang was surely hoping that today's financials would settle the matter, as were many inside and outside his company. Wall Street hates uncertainty, and so does Silicon Valley's careerist corps of engineers. No such luck. Yahoo's earnings were good, but not good enough to be decisive and prompt Microsoft to bid more. But really, why would it? Microsoft's $31 a share offer wasn't predicated on Yahoo's current performance, but what Microsoft managers thought they could do with Yahoo if they got their hands on it. If Steve Ballmer wanted this to be over with quickly, he'd simply offer more than $31 a share; that he hasn't is the best indicator of his low opinion of Yang and his crew.

So why the emphasis on Yahoo's earnings? Financial reports are numbers, not guesses. They boil down a company's prospects into easily digested figures. But their preciseness is their weakness; they look back, not forward. What investors — and acquirers — pay for is future results, not past performance.

What Yahoo is worth isn't about how fast Panama can ramp up search-advertising revenues, or whether dropping it for Google will produce more money. It's about what Yahoo could do if you ripped out existing management and replaced it with executives who have the respect of their employees and can command, and obtain, results. If Yahoo's engineers could push out a product like Panama in months, not years, the way Google's seem to do.

The hidden message in Microsoft's seemingly firm price is this: Ballmer thinks Microsoft's Web properties are doomed on their own, and his crew of screamers can run Yahoo a bit better than the muddle-headed consensus-mongers in Sunnyvale. But not that much better. If he really believed in his own people's abilities, wouldn't Ballmer just up his bid and seal the deal?

5:00 PM on Tue Apr 22 2008
By Owen Thomas
1,462 views
6 comments

Comments

abettertomorrow at 05:21 PM on 04/22/08
Reply by Email
*

but up it to what? It would be one thing if the Y! board came back and said we'll sell at $32, or $31 all cash - but the came back and said $41 or something equally ridiculous. If Ballmer offers $32 all cash, it would just be ammunition for Yang and crew to hold out.

Remember that Yahoo! was trading around $19 (!) before the MSFT offer. If the board won't sell willingly at $31, I can't believe they'll sell willingly at $33.

So disagree with the post. Conceivable that they could have gotten a better price had they sat down earlier, but at this point it's clear they will do anything possible to avoid a sale to MSFT - including, in my opinion, significantly increase the risk to their shareholders without increasing the potential return.
giddieup at 05:31 PM on 04/22/08
Reply by Email
*

i would just walk away and let the stock slip back to the teens, then come back and see if they want to talk then.

i am sure the investors will by then kick jerry out of there and replace him with someone that actually is looking in the best interest of the shareholder rather than be in the "i rather die before selling MY company to microsoft" camp.
xhooter at 03:06 AM on 04/23/08
Reply by Email
*

Owen,
I wouldn't characterize the performance as "good but not good enough to be decisive".

Let's take a quick look at the growth rates in the press release:
· We see 9% top line growth, 7% of which is from Ads. The 9% includes the impact of the growth in Fees. You have to wonder how sustainable the Fees line is given the $350 million AT&T settlement.
· Recall that Sue's strategy is to become a leader in off network advertising. Here, they lost ground as the market grew around them. Ooops! So they did better on network, and showed some growth there.
· So, we have Revenue up 9%, 14% after TAC, and Gross Profits up 11%, but Operating Income was down 28%. That's not as bad as it looks, but even backing out the special charges, gets you to low growth.
· Net Income was flat, year over year. The only growth here was attributable to Alibaba, which they don't control. Even the Non-GAAP net income number they show is flat.
· Back out the AT&T payment and you have flat Cashflow from Operations:
· And if you look at Free Cash Flow, Sue's preferred measure of performance, and back out the AT&T payment, the story is more bleak. Without the AT&T payment, 647 goes to 297, which is about a 20% decline:

So, is that "good"? Where are the bright spots that are going to drive growth in this company? It's pretty hard to see from the numbers they present.
kenobi at 10:38 AM on 04/23/08
Reply by Email
*

Microsoft is going to acquire Yahoo. It's when, not if, considering that Steve Ballmer's reputation is on the line.
lestack at 11:09 AM on 04/26/08
Reply by Email
*

$31 was a huge gift, an undeserved bonus to yhoo management. IMO, the pricing issue is a smoke-screen. This is about Yang and some Yahoo lifers holding on to their lifestyle. To these people its career death to report to MSFT and god forbid be accounatable for meeting a much higher bar.
lestack at 11:13 AM on 04/26/08
Reply by Email
*

I don't agree Ballmer's reputation is on the line especially if he offers up another good option. MSFT has been criticised for sitting on this huge pile of cash and living off the fat of the land. They need to show they have some more moves.