Feb 14, 2008

The importance of being Yahoo's Valentine

The irony about writing on technology is that much like the subject itself, it becomes obsolete before you can say "Gordon Moore". Which is why analysing Microsoft's bid for Yahoo and the subsequent refusal is not exciting, now that we are a couple of weeks into it. But what would be really interesting to watch is Yahoo's flirtation with News Corp., considering the fact that it just passed on over $44 billion from the Redmond giant.

Is Jerry Yang simply holding out for a better price from Microsoft, considering how desperate Microsoft has shown itself to be in the race for the Web dollar? Or does he believe that a tie-up with the media behemoth can actually bail Yahoo! out of its impending financial crisis, given its relatively poor performance in online advertising sales vis-à-vis Google? (Even with all the commotion around it, Yahoo has been acquiring online ad companies to stay afloat.) The Wall Street Journal says that its owner News Corp could hand over MySpace and some other online properties to Yahoo for as much as 20% stake in the Web giant. This could keep Yahoo safe from a hostile bid from Microsoft, and also give it access to a wider user base, not the least of which would be the world's largest social networking site. Of course, monetising it would be a different story.

Looking from Microsoft's perspective, it just may be willing to raise the offer if Yahoo plays its cards right. But given the fact that it would have to finance even part of the current offer with debt, which would be a first in the company's history, it is highly unlikely to be much of an increase. Microsoft's stock did crash as soon as the offer was made, reflecting possible shareholder opinion that even the current offer is too much.

But even this willingness to borrow for the first time clearly indicates how serious Microsoft is to get Yahoo. Both the companies have been playing catch-up with Google in online advertising revenues, and neither have had much success yet. Even together, they may not be able to do this, given the complexities of integrating two large hi-tech companies and hit the ground running in probably the world's most dynamic industry. As one comment in a news site said, "Tie two rocks together and they still sink." Maybe. Depends on what you tie them with.