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Monday, April 07, 2008

Yahoo Had It Coming

For anyone who subscribes to my weekly FrankelTips column, you knew this was coming. The demise of Yahoo was never in question. It was just a matter of time until someone, somewhere, figured out that were the company in even worse shape, it would have simply collapsed years ago. Now, ever the predator, Microsoft sniffs the blood. Like a hyena, Steve Ballmer is circling its wounded prey, watching and waiting for its simpering victim to buckle and surrender.

Unfortunately, the death of Yahoo is not going to be quite as quick or painless as one would hope. Nor does Yahoo deserve it. Years of brand neglect, reckless management and just plain stupidity have finally caught up with the company who owned, then fumbled and lost dominance in the internet space.

On paper, the deal makes sense: Even at Yahoo's current stock price -- inflated nearly 35% by the prospect of a Microsoft takeover -- Yahoo is hardly underpriced. Its market cap is roughly $37 billion, although when the drugs wear off, it's actually closer to $20 billion (if that). If you're into stock analysis, you might also be interested to know that Yahoo's price to earnings ratio is astronomical, causing nosebleeds at something around 59. The company has never paid a dividend. It has never had sane management. And now, Yang, Bostock and company are whining about how Microsoft's offer is too low.

Please.

If anything, Microsoft's offer is too high. The mere fact that previous to Microsoft's offer of $31 a share Yahoo stock was languishing in the high teens should be enough to tell you that this company was going nowhere fast. One look at the history books should be enough to show you that Yahoo once owned the search market. If you really want to know why Yahoo will quickly succumb to Microsoft, consider the old Machiavellian adage:

The quickest ascension to power is through a vacuum.

The truth is that Yahoo got there first, and like most first-in-the-space players, enjoyed considerable success. It got big fast because there really weren't any other serious competitors. But like other successes whose good fortune is more a result of good timing than good thinking, Yahoo's managers began to believe their own press. As I've written previously in this blog, they hired a show business guy who knew nothing about the web as their top gun. His ineptitude set Yahoo on its precarious, downhill course and the company never recovered.

Actually, Yahoo never had a chance because they never had a brand. Sure, they had an identity, but nobody -- not management, not employees, not developers nor users -- could ever tell anyone else precisely why they chose Yahoo as "the only solution to their problem." Sure, they recognized the now-famous yodel on the radio, but what of it? Who cares?

As it turns out, nobody cares, which is why nobody is weeping to see Yahoo slowly getting sucked up by Microsoft, itself among the least well-received brands on the market. But the news isn't bad for Yahoo. It's probably the best thing they could hope for.

In the first place, as the Dark Force consumes Yahoo, you can bet that it will do what software engineers do best: restore discipline to clearly-focused deliverables. Yahoo could do well with a healthy shot of discipline. After wandering aimlessly about, never knowing who or what it was supposed to be, a good trip to the strategic wood shed could help it restore both functionality and purpose.

Second, Microsoft would have to be pretty stupid to completely abandon the Yahoo identity. Although there's no value beyond its identity, there is brand awareness, which means that if (and this is a real big "if", considering that Microsoft has no brand value, either) Microsoft can define why Yahoo is worth using, they might be able to quietly avoid questions as to why MSN is such a terrific failure in the hearts and minds of the public.

Hey, if you can't make it, buy it.

Finally, Microsoft has always been financially successful. There really isn't much more to this story than the old-fashioned "buy low, sell high" strategy. With all the hype about hostile takeovers and Microsoft buying Yahoo, nobody ever said that Microsoft had to buy and keep Yahoo. At these bargain basement values, they could turn the old "pump and dump" trick and spin off Yahoo in a few years at a healthy profit.

Personally, this whole affair reminds me of a classic Hollywood thriller. No, not Wall Street. More like Dumb and Dumber.

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