Filed under: Forecasts, Deals, Competitive strategy, Google (GOOG), Microsoft (MSFT), Yahoo! (YHOO)
Yahoo!’s (NASDAQ: YHOO) board of directors officially rejected Microsoft”s (NASDAQ: MSFT) already generous bid of $44.6 billion for the company. Not a surprise, and Microsoft will actually pay up for the deal to occur. Microsoft has to and they’re now over a barrel. Let’s explore why.
Microsoft spent over $6 billion last year to acquire the best company in the on-line digital advertising/marketing space, aQuantive. To monetize this acquisition and effectively, or least try to compete with Google (NASDAQ: GOOG), Microsoft needs a much more massive platform in the search engine sector. No question, even with all of its might and brand name recognition, the best Microsoft could muster is a 3.9% market share for its MSN versus Google’s big 76%. Yahoo! has 15% share and combined with MSN, the share rises to just under 20%. Still a small player versus Google but a viable one.
Microsoft allegedly bid for Yahoo! last year for $40. Although never confirmed by the various celebrations, but the leak-the-news network pretty much had it in tow. Otherwise, why would Yahoo! reject $31 per share offer, a good 60% higher than its recent stock market price of $19.18? Because Yahoo! knows full well that Microsoft needs Yahoo! very, very badly.
On its own merits, Yahoo! is a broken story. Momentum is gone and senior management is adequate at best. Investors know it, too. At each turn, Google is knocking the heck out of Yahoo! and Microsoft as well. Microsoft knows it can’t build it, it must be acquired. No other viable option. Period.
Yahoo!, however, for a broken story is sitting in the cat bird seat–at least for the moment. The smoke screen of combining with AOL or partnering up with Google are neither an acceptable option nor a long term viable strategy. The stakes in the search engine/digital advertising/marketing game are enormous. Let’s put this into perspective. In less than ten years of existence and less than four years as a public company, Google is on track to accomplish $16-17 billion of revenues this year. No other company in American corporate history has reached this kind of hyper-growth. Take a minimum of 30% growth for the next five years and Google’s revenues will be at a staggering $55-60 billion. The profitability is also at a stunning rate of 35% plus.
Microsoft will swallow its pride and some of its own current market cap and pay up for Yahoo!. Microsoft began this movie and now they have to finish it. In the meantime, Yahoo! personnel are and will continue to be distracted and as I wrote before, Google can pick up even more market share these next 18 months before Microsoft has a clear strategy with the eventual Yahoo! acquisition.
Georges Yared writes about great growth stocks today in GameOn Investing.
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