Bravo Google: well played, indeed

You really have to hand it to those Google boys, they are smart.  And they really know how to play the game of business, don’t they?

Let’s recap just a little, but we have to think way back to the very beginnings of the presidential primary season.  Google was humming along as usual, with no end in site to their dominance in the online advertising world.  Yahoo, the distant number 2 in the industry, was fading quickly.  Amid mounting pressure to change the downward trend, Yahoo was presented with a “damned if you do and damned if you don’t” proposition from Microsoft, to become part of the perpetual evil empire.

Google wasted little time in parrying this potentially formidable threat to the company’s dominance.  A combined Microsoft-Yahoo would still have laid claim to less than a third of the market share that Google commanded, but it would have aligned the coffers of Microsoft (which is still trying to figure out how to spell Internet) with the braintrust that practically invented web portal and search.

Now, it’s true that a Microsoft-Yahoo merger would have been an utter failure.  But, the potential for a sea change was there, and Google didn’t hesitate to act.  Through incredibly adept maneuvering, Google positioned itself as the white knight saving the poor damsel in distress from the clutches of the dragon.  Google and Yahoo struck a deal for Google to serve search advertising for Yahoo. And, the world rejoiced!

But, Google had to know that a Google-Yahoo deal to corner 90% of the online advertising market would come under intense scrutiny from federal regulators, didn’t they?  Of course, they knew.  They knew because  the main sticking point in the Microsoft-Yahoo merger talks was the scrutiny that the new entity would come under for controlling less than 80% of the web email market.

And now, Google has pulled out of the deal with Yahoo citing concerns from federal regulators.  So, what did Google get out of all this?  Well, before the Microsoft offer, Yahoo traded at about $20 per share and Microsoft traded at nearly $35 per share.  Today, Yahoo is even weaker at $14 per share, while Microsoft is at $22 per share, making a merger politically difficult for both companies.  So, Google is secure in the knowledge that it will continue to own online advertising for a very, very long time, and it didn’t even cost them a penny to do it.

Bravo!

Microsoft-Yahoo: lessons from Oracle-BEA

Given the timing of events, it’s hard not to compare the current Microsoft-Yahoo takeover battle with the recently concluded conquest of BEA by Oracle. Some of the parallels are quite obvious with large, stalwart, traditional software organizations making bids on younger, (some would say) cooler targets in areas tangential to the core of the would-be acquirer. But rather than focus on the relative business domains of the participants, it’s much more interesting to dissect how the Oracle-BEA drama has impacted the strategies for both Microsoft and Yahoo.

Oracle originally offered BEA a 21% premium. In retrospect, this offer was a mistake that allowed the deal to linger far longer than was necessary. Ernst & Young has determined that the long-term takeover premium is approximately 24%. Given BEA’s position as the #2 vendor of enterprise middleware software, Oracle should not have expected to get a below-average price for such a target. By contrast, Microsoft’s initial offer to Yahoo provided for a 63% premium. Microsoft did not entertain the idea of getting Yahoo on the cheap. Microsoft realized that Yahoo is prime real estate and made a compelling offer.

Given the offer price, BEA had the luxury of time to negotiate with Oracle. BEA only had one very vocal investor, Carl Icahn, applying pressure on the BEA board to accept and offer or sell the company off in pieces. However, with a 63% premium dangling in front of them, a good many more of Yahoo’s shareholders are applying pressure on the company to act in one way or another to increase their investment.

On the flip side, Yahoo has a good many supporters, particularly within their user community, who have implored the company to avoid “going over to the dark side.” This groundswell of support, which did not exist to nearly the same degree for BEA, has given Yahoo the ability to push back and actively seek out a white knight strategy, seeking partnerships with either NewsCorp or Google as a way to bolster the company’s flagging stock and remain independent. This has forced Microsoft to take the fight directly to the shareholders, which is a much more cumbersome process.

In addition, Yahoo has taken the bold step of acting like a strong company instead of the weakling that BEA portrayed. Yahoo continued to acquire companies themselves, and to restrategize their core business. These moves can only work to improve Yahoo’s position.

Much of the Microsoft-Yahoo drama is yet to unfold, and there will undoubtedly be at least one significant plot twist ahead. Will Microsoft be able to dangle a big enough worm in front of Yahoo shareholders to set the hook? Will Yahoo find shelter in a nearby reef? Will a bigger fish come by and steal the prize first?

My gut tells me that eventually Microsoft will get what they covet. The only real unknown is how much it will cost.