Microsoft & Yahoo – what a mess…

I am really enjoying this saga.

Yet again, Steve Ballmer has shot himself in the foot BIG TIME with his open and threatening letter to the Yahoo board at the weekend.

Dear Members of the Board:

It has now been more than two months since we made our proposal to acquire Yahoo! at a 62% premium to its closing price on January 31, 2008, the day prior to our announcement. Our goal in making such a generous offer was to create the basis for a speedy and ultimately friendly transaction. Despite this, the pace of the last two months has been anything but speedy…

Given these developments, we believe now is the time for our respective companies to authorize teams to sit down and negotiate a definitive agreement on a combination of our companies that will deliver superior value to our respective shareholders, creating a more efficient and competitive company that will provide greater value and service to our customers. If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo! board. The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal.

It is unfortunate that by choosing not to enter into substantive negotiations with us, you have failed to give due consideration to a transaction that has tremendous benefits for Yahoo!’s shareholders and employees. We think it is critically important not to let this window of opportunity pass.

Sincerely yours,

Steven A. Ballmer Chief Executive Officer Microsoft Corporation

You know what, Steve Ballmer has made two massive errors with this letter:

  1. He has basically admitted that Microsoft really need Yahoo, and in a sense, more than Yahoo need Microsoft.
  2. He has removed any possibility of a “graceful” way out for Microsoft if they decided that ultimately the value wasn’t there. (Can I use Graceful and Steve Ballmer in the same sentence?)

It was hardly surprising then, that the Yahoo board responded with a very unambiguous Piss Off!

Dear Steve:

Our Board has reviewed your most recent letter with regard to the unsolicited proposal you made to acquire Yahoo! on January 31, 2008.

Our Board carefully considered your unsolicited proposal, unanimously concluded that it was not in the best interests of Yahoo! and our stockholders, and rejected it publicly on February 11, 2008. Our Board cited Yahoo!’s global brand, large worldwide audience, significant recent investments in advertising platforms and future growth prospects, free cash flow and earnings potential, as well as its substantial unconsolidated investments, as factors in its decision…

…Our Board’s view of your proposal has not changed. We continue to believe that your proposal is not in the best interests of Yahoo! and our stockholders. Contrary to statements in your letter, stockholders representing a significant portion of our outstanding shares have indicated to us that your proposal substantially undervalues Yahoo!. Furthermore, as a result of the decrease in your own stock price, the value of your proposal today is significantly lower than it was when you made your initial proposal…

…We consider your threat to commence an unsolicited offer and proxy contest to displace our independent Board members to be counterproductive and inconsistent with your stated objective of a friendly transaction. We are confident that our stockholders understand that our independent Board is best positioned to objectively and knowledgeably evaluate our Company’s alternatives and to maximize value.

Not bad, they managed to get unsolicited in to their letter 4 times.

For sure, if Microsoft do acquire Yahoo (which they probably will) then there is now so much animosity between the two that Microsoft will end up buying a dead dog. The shareholders will take Microsoft’s money and leave with a smile on their face and the faithful Yahoo customers will leave in droves post acquisition. Yahoo’s decent staff will also probably not want to hang around that long either. Leaving Microsoft with a very hollow pyrrhic victory.

Yahoo’s technologies are based largely on Open Source solutions and we all know how long it took Microsoft to move Hotmail off OSS and onto NT – many years and lots of extra hardware…

So that’s really good news!

Keep it up Steve. If you carry on like this Microsoft will be finished a few years.