Is Yahoo Worth Buying?

If I had a billion dollars, I’d be rich (with my apologies to Barenaked Ladies). If I were trying to buy Yahoo, I wouldn’t even be in the running.

Microsoft offered $44.6 billion, or $31 a share, a 62 percent premium on Yahoo’s share price at the time, for Yahoo. And what did the Yahoo board do? They sneered at it because the offer “substantially undervalues” the company.

Boy, I wish I could sneer at $44.6 billion. So, what would Yahoo consider a fair price? Maybe, some stock analysts have suggested to me, oh say, $60 billion. No offense to my day trading friends, but I think they’re getting a wee bit greedy with those estimates.

Indeed many people don’t care for the proposed Microhoo. Google, of course, doesn’t like it, but they’ve got their own priorities and messing with Microsoft’s proposed Yahoo deal is near the top of the list. The more the deal costs Microsoft the better, as far as Google is concerned.

Some people, however, really hate the idea. Henry Blodget, the well-known CEO and editor in chief of Silicon Alley Insider, a New York digital business community news site called the proposed acquisition a “disaster” in the making. Blodget went on to say that Microsoft CEO Steve Ballmer “is not used to losing. They’re doing something that’s conceptually smart, but that’s not going to work.”

Why? Well there are the usual reasons. There’s no real synergy between Microsoft’s Windows-based software and Yahoo’s FreeBSD/open-source Web 2.0 applications. The two companies’ corporate cultures are as mixable as oil and water. And, lest we forget, Yahoo’s in trouble. As I started writing this story, I see that Yahoo began firing, excuse me, laying off the first of 1,000-plus employees.

Yahoo, tell me again how Microsoft has undervalued the company. I’m sure your newly unemployed staffers would love to hear the details.

Meanwhile, Microsoft is undeterred and insists that it’s going to buy Yahoo. It’s not upping its offer, yet. Instead, it seems to want to see if it can get the stockholders to accept its offer over Yahoo’s board recommendations. Some of Yahoo’s stockholders, an informal group named Group B, seem to be in favor of the deal.

Microsoft Must Up Its Ante

For more than a year now, Group B has been doing its best to get Yahoo to radically change course. They believe that Yahoo’s former CEO, Terry Semel, and current board, have been driving the company into the ground. Given Yahoo’s lousy track record for the last few years, it’s easy to see their point.

Eric Jackson, the leader of the group of 100 current and former Yahoo employees that own 2.1 million shares, are in favor of taking the best offer on the table. And, for now, that’s Microsoft. As Jackson said in his blog, “We have no desire to see Yahoo! continue independently with the current board and management team in place.”

For better or worse, though, Group B, while looking for others to join it, owns only a tiny fraction of Yahoo’s total stock holdings. Microsoft is hoping that others will join with them.

I suspect, however, that Microsoft is going to have to up its ante before it can make a deal. I still think Microsoft needs Yahoo. I also agree that it’s a potential disaster. And I also agree that it’s going to take a tremendous amount of work to pull these two companies together. On the other hand, what other choice does Microsoft have?

As my Microsoft Watch colleague Joe Wilcox recently said, “Microsoft’s bid, assuming that it is sincere, reveals that the services platform is vaporware. Sure, Microsoft has built out something, but it’s not nearly enough to compete with Google. Microsoft has tacitly admitted that it’s even farther behind Google than anyone suspected.”

I agree completely. In chess, there’s a horrible situation you can end up in called zugzwang. It’s a German word that means that you’ve got to move but that any move you make is only going to make your situation worse, usually a lot worse. Welcome to zugzwang, Microsoft. You’ve got to buy Yahoo to try to improve your online position, but, for now, no matter how you do it the move is going to hurt.