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An example of how not to go for an acquisition

An example of how not to go for an acquisition
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First Published: Tue, May 06 2008. 10 58 PM IST
Updated: Tue, May 06 2008. 10 58 PM IST
So after all that, Steven A. Ballmer looks like all hat, no cattle.
After three months of huffing and puffing, Ballmer, the chief executive of Microsoft Corp., abandoned his quest for Yahoo Inc., a deal he once called crucial to the future of his company, without even a scuffle. Ballmer sent a thank you note to his opponent, Jerry Yang of Yahoo, to “convey my personal thanks” for “the time and attention all of you have given to this matter.” Nice guy.
Yahoo may look like the big loser (more on that in a moment) but for Microsoft, this has been a remarkable lesson in how not to do a deal. When he made his bid, Ballmer trumpeted a tie-up with Yahoo as “the next major milestone in our companywide transformation to embrace online services, search and advertising.” But, when Yang refused to knuckle under, Ballmer just ... waffled. Faced with the choice of upping his bid by another dollar or two a share or making a hostile offer, Ballmer did neither. Instead, he took his ball and went home.
Microsoft has tried to spin its reversal as a show of “discipline” and “self-control.” But what it really shows—painfully—is Ballmer’s indecisiveness about this deal. Even one of his aides described Microsoft’s approach as “amateur hour.”
Ballmer miscalculated from the start. He misread his own shareholders, who hated the deal and drove down the stock. That, in turn, diminished the value of Microsoft’s cash and stock bid. (its stock lost $24 billion (Rs97,440 crore) in value thanks, in part, to the Yahoo bid.)
Some of Microsoft’s most valued employees hated the deal too, arguing it was a mistake. And Ballmer also didn’t appreciate that he was going to have to negotiate against himself—and against a target that would make the economically irrational decision of rejecting an offer that was more than 70% above the market price.
But most of all, Ballmer didn’t realize that when you make a blockbuster unsolicited offer, you must be prepared to win. Not necessarily win at any cost, but win at a cost within reason. (Just ask Rupert Murdoch.)
And the truth is, the few extra bucks that Yahoo wanted in order to save face was within Microsoft’s ability to pay without wrecking the economics of the deal.
True, Ballmer upped his bid once, by $2 a share from $31. But as his advisers knew—and Yahoo’s investors were saying out loud—he needed to cough up at least another dollar a share. If he had done so, he probably would have won a proxy contest.
Bill Miller, the money manager at Legg Mason, which is one of Yahoo’s biggest investors, said as much. “Had there been a full deal on the table, a hostile deal, at $34 or $35, we would have had to take a look at it,” Miller said in frustration. But that would have meant that Ballmer would have to go through with a proxy fight, as he kept threatening to.
To hear Microsoft’s aides tell it, Ballmer never quite made up his mind. The more Yahoo resisted, the more he lost heart. He asked during meetings and conference calls, “Should we just forget it?”
Ballmer made things worse by lashing out at the company he was wooing. He contended that “public indicators suggest that Yahoo’s search and page view shares have declined.” He threatened to go on the attack, but never did.
And on Saturday, after Yahoo rejected his $2 a share increase, Ballmer finally walked away. We’re fine without them, he basically said.
Don’t get me wrong: Yahoo made mistakes, too—lots of them. Its entrenched management team, led by Yang, did everything in its power to thwart the bid by Microsoft, which Yahoo has always viewed as the Evil Empire. Many on Wall Street find it hard to believe that Yahoo negotiated in good faith, despite assurances that it wanted to reach a deal. Yang’s comment, when he described the talks as a “distraction,” says it all.
Yahoo came up with a three-year strategy plan to justify a higher valuation for itself.Virtually no one took it seriously, however.
Yang’s company is now about to enter into an advertising deal with Google Inc. that will make Yahoo a puppet of one of its competitors. Judging by the stock market, Yahoo’s demand for $37 a share is ludicrous. The stock is trading 35% below that price.
Perhaps the biggest problem in this deal was that neither Microsoft nor Yahoo heeded Wall Street’s advice or listened to what the market was saying. Each company hired armies of bankers, but neither really paid attention to what their advisers told them.
Say what you want about bankers, but they at least are good at parroting the markets. At one meeting in Portland between both companies, a Yahoo executive dismissed his company’s bankers as “potted plants”—in front of them.
Maybe Ballmer will prove everyone wrong and try to buy Yahoo again, at a lower price. He would just have to make up his mind first.
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First Published: Tue, May 06 2008. 10 58 PM IST