Yahoo Bid shows Microsoft on the Ropes

Ponca City, We Love You writes "One day after the announcement of Microsoft's plan to buy Yahoo, there is an interesting piece from the NY Times analyzing the reasons behind Microsoft's bid and proposing that the bid is a tacit, and difficult, admission that Microsoft did not get its online business right and that online losses continue to mount while Google makes billions in profit. Microsoft "finds itself in a battle where improving its search algorithms and online ad software is not going to be enough," writes the Times. With the Yahoo bid Microsoft is trying to buy a big enough share of the market to be a credible alternative to Google with online advertisers. "This shows just how worried Microsoft is by Google," says David B. Yoffie. "Microsoft has faced competitive threats before, but none with the size, strength, profitability and momentum of Google.""

Comments

Re:Eh?

[Dan100]

People aren't buying Windows Vista and Office 2007 because they have Windows XP and Office 2003 that does the job just fine, and possibly better, and it costs nothing to continue using it.

Please folks, RTFA. To quote:

[Last year] The Office division alone had quarterly revenue of $4.8 billion equal to Google and an astronomical $3.2 billion in operating profits. The Windows unit is even more profitable.

In fact, Microsoft's Q1 results last year were the best for seven years:

Microsoft stunned Wall Steet with its latest financial results, based on the success of Windows Vista, Office 2007 and the Halo 3 game. First quarter revenues jumped by 27% to $13.76 billion, and profits by 23% to $4.29 billion. Sales beat expectations by more than $1bn.

Microsoft dwarfs Google in both revenue and profit. It's just lost out in the online services market (where despite rising revenues it still makes a loss), and wants to catch up. To do so, it can afford to make investments nobody else can, such as buying out another huge company with a big (if not terribly profitable) portfolio of online services. Together, the "network effect" would make both much more profitable than they are operating seperately.

Re:I think MS really SHOULD improve that ...

[KokorHekkus]

Except that the Xbox and Xbox 360 has been major economic sinkholes. From 2002 to 2004 the then Home and Entertainment Division made an accumulated loss for 3.5 billion dollars. From 2005 to 2007 the new Entertainment and Devices division made an accumalted loss of 3.7 billion dollars. So over those 6 years they lost 7.2 billion dollars. Imagine how hard it will to make that money back (plus the lost interest on it) from a division that has a 6 billion revenue per year and never has shown a profit.

Microsoft has tried several directions when it comes to break into new markets but let's face it, they haven't done a very good job of it. Their money comes from the Server and Tools Division and the Business Division (Office etc.). And I don't think it's going to change... perhaps because they aren't used to competing on merits alone.

2004 10-K (has the 2002 to 2004 numbers) http://www.sec.gov/Archives/edgar/data/789019/000119312504150689/d10k.htm 2007 10-K (has the 2005 to 2007 numbers) http://investing.businessweek.com/research/stocks/financials/drawFiling.asp?docKey=136-000119312507170817-22AR89VDNH3I307BANT6DSD928&docFormat=HTM&formType=10-K

They never did that

[Tony]

Microsoft was never about giving the customer what they wanted. Microsoft has been about making sure the customer only had access to Microsoft products. That meant they had to have products in the first place, sure; but Microsoft has manipulated the market so they were the only ones available. (This is heavily documented in their anti-trust trials).

They started doing this once IBM gave them an exclusive contract to provide MS-DOS for the original IBM PC. By the time Compaq and co. had their clones ready, MS-DOS was the only game in town. Later, when DR-DOS came around, it started making *serious* inroads. Microsoft then made per-processor deals with the OEMs, making sure a copy of MS-DOS was sold with every processor, whether it *shipped* with the processor or not. This made it economically difficult for the OEMs to sell DR-DOS instead of MS-DOS. (DR-DOS was *far* superior to MS-DOS.)

It's these bundling deals that kept Microsoft at the head of the market all those years. Once they got a significant lead, it became impossible for any other competitor to create a competing product.

Microsoft was helped by some incredibly stupid decisions by other companies, true. (SEE Novell, and their handling of Word Perfect and Novell Office, for instance.) However, it' Microsoft's ability to warp the market to their own ends that has kept them on top, *not* giving the customer what they wanted. (They were so successful at market manipulation, the customer often never knew there *was* an option.)

When there's only one trail, the customer can't walk. That's what monopoly abuse is all about. We don't call it "lock-in" just to amuse ourselves.

Re:The bid is public ... so

[OakLEE]

And I wonder who's buying all of these, in reality? Someone who'd pay 31 dollars for a share, when they could instead buy it in-market at 28?

To answer your first question, they are called risk arbitrageurs. They essentially buy the stock of the target company and short sell the stock of the acquiring company. They make a profit as the target's stock price appreciates to the offer price and as the acquiror's price decreases because of the costs of the takeover (e.g., cash paid out, dilution in stock value, debt taken on).

Their presence, and the reason Yahoo!'s stock only trades at ~$28 is due to the risk that the deal will not close. Deals have to go through a lot of vetting both by the government (DOJ, FTC) and by the parties making them. There is always a risk that at some point along the way either the government will not approve or one of the parties will get cold feet. This is especially true of hostile takeovers, which this offer is similar too, because the target is by its nature an unwilling participant.

As for why Microsoft is not buying in the open market, the short story is that there are a lot of rules and regulations that would just make it a stupid idea. For example, their are lots of disclosure rules that go into effect as an individual (or corporation's) stake in another company increases. Since Microsoft cannot buy all of Yahoo!'s shares on the open market all at once, it would have to fulfill these requirements and essentially announce to the world that it is acquiring Yahoo! before it has done so. This would probably cause a lot of investors to hold out from selling in an effort to get Microsoft to pay more for their shares. If Microsoft is far enough along in its purchases, it would have to capitulate because the cost of backing out and dumping all of its shares would be too high.

That's where the risk arbitrageurs step into the picture in a funcitonal way. Microsoft essentially announces what it will pay. All of the antsy Yahoo! shareholders sell to the arbitrageurs who then must try to help the deal close so they can make their money. This effectively allows Microsoft to offer $31 a share without incurring any of the hold out risk inherent in trying to buy in the open market.