Yahoo! Rejects Microsoft's Bid

As I’m sure you know these companies have been making a ton of headlines this week. After both found themselves unable to successfully compete against the leader in internet search and advertising, Google (Nasdaq:GOOG), Microsoft (Nasdaq:MSFT) made a $44 billion unsolicited bid for Yahoo! (Nasdaq:YHOO) last week.

Yahoo!’s board was set to meet on Friday to decide what, if anything, they would do about the offer, about Google and just about Yahoo!’s overall problems in general.

Well, as of Saturday morning the Wall Street Journal was reporting that “someone familiar with the matter” (I love how there’s always one of those) stated that Yahoo! would reject the offer and wouldn’t consider anything lower than $40 per share. That would put Yahoo! at a $53.6 billion valuation – a 20% premium to the current offer and 35% premium over Yahoo!’s current stock price.

So that wasn’t an out-and-out, “No, we think this is a bad idea”. It was more of a, “This is a good idea, but only at the right price.”

But the question is, would that price be “right” for Microsoft?

Yahoo!’s stock hasn’t come anywhere near $40 per share in over 2 years which basically means that even though the company has been going on a software development spree – releasing new versions of its ad system, it still hasn’t been unable to come close to competing with Google.

And if I were Microsoft, I’d certainly take that into account. In fact, let’s pretend I am Steve Ballmer for a second (and thank the lord that I’m not), here’s my logic for evaluating the Yahoo! deal:

1. How much more money could we make in online ads by having Yahoo! on board?
2. How much could we save?
3. And most importantly, what would Yahoo! do if we didn’t buy them?

You may be wondering why number 3 is the most important – wouldn’t it be more logical to think of it all in dollars and cents? Well, yeah, I’m sure it would be more “convenient” but here’s my logic in putting so much emphasis on number 3.

Yahoo! as a standalone company cannot compete with Google, or Microsoft for that matter, in terms of capturing greater market share of the search advertising business – the crown jewel of online advertising. Which means the company is destined to become a laggard in this space (assuming lightning doesn’t strike) which will leave it ripe for picking at a later date.

Yahoo! could also decide to partner with Google for its search engine ad technology – which in the short run would definitely bolster the company’s financial situation, but longer term would leave it strategically vulnerable. I mean, what value would this company have as a technology company (one that thrives on innovation) if its most popular division was powered by somebody else? It would be like Budweiser putting Coors into its classic brown bottles and hoping no one would notice – certainly a tough hole to crawl out of.

Neither of these alternatives would give me a warm n’ fuzzy feeling if I were a Yahoo! shareholder.

So back to Microsoft – here’s a company that’s willing to give Yahoo! shareholders something for their patience. It would give both companies the ability to actually compete with Google for the first time and the scale they would gain in terms of traffic, reach to publishers, etc. would put the combined company in a prime position to increase ad rates and revenue across the board.

Granted Yahoo! employees might not be ecstatic about it, but Microsoft said they’d retain the Yahoo! brand and probably much of the culture. I don’t think regulators will have any problems due to the fact that the combined “Mahoo” (as it’s being called) still wouldn’t completely eclipse Google in terms of traffic or scale.

So if $31 is too low and $40 is too high – what do you say we split the difference, call up Ballmer and Yang and tell them to settle on $35.50? Then everybody’s happy and Google can finally get a run for its money!

Who’s with me?!