All Things Digital

Reports, rumors and innuendos are bouncing around the Web that Google may not want to cut an advertising deal with Yahoo after all. This before there is actually substantiation that Google and Yahoo are crafting an advertising deal, which was something of a rumor and innuendo in the first place, allegedly planted to let Microsoft know that Yahoo had options.

Google is allegedly worried about ticking off Washington officials who might think that if Google is playing ball with Yahoo, Google has become an antitrust violator that must be terminated. As if Google isn’t already close to monopoly power in search. It gets 67% of all searches, and that share keeps growing. Google worrying that a Yahoo deal will push it over the brink in antitrust is like Kim Jong-il worrying that if he puts on a party hat he’ll be considered crazy.

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In a surprise move just unveiled this morning, a handful of big players led by MySpace and Yahoo have announced that public profiles, photos, videos and friend networks will now be portable from one site to another. We’re immediately wondering why this was a partnership between a handful of big sites instead of a move to truly open the Web in general.

According to a first report on TechCrunch, the initiative will begin with user information from MySpace being made available to Yahoo, Twitter and eBay in the next few weeks. MySpace is reported to have said that they will seek ways for “mom and pop sites” to participate as well in the future.

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In the wake of Microsoft’s aborted courtship of Yahoo and Jerry “Oh, did you increase your offer?” Yang, there’s bound to be a lot of scrutiny about what’s next for Yahoo.

One asset that’s well known but perhaps not scrutinized from an investment perspective is Flickr, the world’s most popular photo-sharing site that Yahoo picked up for a song (estimated $40 million) in 2005. Today, Flickr attracts more than 44 million unique visitors a month, according to Comscore, while Compete.com reports Flickr had 30 million unique visitors and 70.2 million page views in the U.S. last month.

Despite Flickr’s popularity, it is arguably under-monetized. In terms of advertising, it’s minimal at best. Instead, Flickr makes most of its money by selling Flickr Pro memberships for $24.95/year and offers e-commerce services through partners such as photocards, posters, frames and calendars.

So, what’s Flickr worth, and, more important, what could it be worth if it was managed more aggressively?

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Microsoft was smart to walk away (for now) from its $44 billion bid for Yahoo. It’s never good to overpay. But the software giant–whose stock has flat-lined for eight years–was on to the right strategy in looking to the Web for growth. Can’t Microsoft build something on its own? Why the rush to pay billions for Yahoo? The simple (and wrong) answer was that adding Yahoo’s 20% Web search market share to Microsoft’s 10% meant that it could compete against Google’s 60% share. Technology changes too fast for that to make sense except on paper.
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Jerry Yang’s spin campaign about why the Microsoft bid fell through is transparent. He’s not trying to cajole Steve Ballmer back to the negotiating table; he’s trying to cover his rear and appease indignant shareholders. The only reason he’s so open about accepting a new bid from Microsoft, I think, is that he’s not expecting another one to come.

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I wrote Friday about the daunting math that Microsoft suddenly faced if it didn’t significantly boost its stake in Yahoo. In short, though Yahoo insiders and generally supportive institutions control less than 40% of Yahoo’s outstanding shares, they easily control a majority of shares likely to be voted in a hostile proxy contest. Average Joes rarely vote in such fights, boosting the power of the pros. Why Microsoft’s bankers at Morgan Stanley didn’t figure this out sooner–or why CEO Steve Ballmer didn’t listen–is one of the intriguing tales that may yet be told. As of the opening bell Monday morning, however, the math changes immediately …

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That sound you hear is the whoosh of nearly $42 billion disappearing from mergers league tables.

When it was announced Feb. 1, Microsoft’s blockbuster offer for Yahoo landed like an asteroid on the deal landscape, terrain made barren by the credit market’s drought and the quakes of the slumping economy. Depending on one’s definition of “tech deals,” the unsolicited offer was the largest-ever.

No more (at least for now). Richard Peterson, an analyst with Thomson Financial, calculated the damage Microsoft’s withdrawal will do to the league tables tracking mergers and acquisitions.

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Now that Microsoft has withdrawn its unsolicited buyout bid, Yahoo investors who are outraged and seeking to extract some pain may gear up to engage in several actions, ranging from gunning for a board seat to voting “against” re-electing the company’s slate, say proxy solicitors and M&A attorneys.

Eric Jackson, a Yahoo shareholder activist, falls into both camps. On Sunday, Jackson said he’s planning to launch a “withhold vote” campaign and hopes to run for a board seat when Yahoo holds its next annual shareholders meeting.

“I’m definitely interested in throwing my hat in the ring, if it’s allowable, and plan to talk to other shareholders,” said Jackson, founder of hedge fund Ironfire Capital. “And whether it’s me or other people who get elected, that’s fine. Yahoo’s current board definitely needs new blood.”

Yahoo, which has yet to set a date for its next annual shareholders meeting, has all 10 board of director seats up for re-election to a one-year term.

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Yahoo CEO Jerry Yang will be slammed in the media over the next coming weeks. In my opinion, the criticism will be well founded. It is very tough to make an argument that Mr. Yang is acting in the best interest of his shareholders in rejecting Microsoft’s buyout offer. Personally, I can’t wait to see how long it takes the share price to reach $33. Good luck, Mr. Yang.

The MSFT/YHOO situation triggers deeper questions as to corporate governance in America. More specifically, what can regulators of U.S. companies enact that will allow shareholders to actually become owners of the companies? Here are some of my thoughts:

1. If the boards of directors are to remain truly independent, how is it that the leaders of the boards can also run the companies?
2. How many CEOs or directors of public companies serve with each other on more than one company’s board?

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A few days ago I had pointed out that Microsoft’s bid for Yahoo was a checkmate kind of a move: Yahoo couldn’t win from this attack. Today, by pulling its bid for the Sunnyvale, Calif.-based search company, Microsoft proved that again, and showed why it is still the Prince Machiavelli of Technology.

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Yahoo is a bleeding animal. Left lying, gasping for its breath, after a larger animal (Microsoft) struck and then walked away after it proved too difficult to eat.

How will Yahoo heal?

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Despite the fact that Microsoft has withdrawn its offer to buy Yahoo, the M&A machinery on all sides is still in full gear, and expect tons of activity in the next couple of months. The $50 billion or so that Microsoft was willing to spend is the money that’s still around, at least on paper. So who will Microsoft buy to make that leap it so hoped for?

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Microsoft says its offer for Yahoo is off the table, but could this be just a negotiating ploy?

It’s a natural question to ask. I mean, if Microsoft has had the hots for Yahoo for two years, can it really be so sure that it is no longer interested?

My take is that Microsoft has ruled out two options, but that one possibility for Yahoo remains out there.

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So, what happens next? Microsoft has walked away from Yahoo, or at least from its current takeover offer, and is saying it will move forward organically–and said word with its reek of cattle feces is appropriate here. Yahoo, for its part, cites–with less specifics than my 6-year-old gives at day-end when claiming “good behavior”–the many golden wonders ahead of it in its post-Microsoft future.

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Barring a come-to-Jesus moment by both sides, “MicroHoo” is dead and buried. So who won and who lost? Months from now, we’ll have a clear idea. In the meantime, here are my back-of-the-envelope picks.

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