ROBGO.ORG

So, I avoided commenting on the Yahoo / MSFT deal during all the speculation.  But in the process of reading through other’s people’s thoughts, I realized that my friend Erik Stuart at Ebay has started blogging!  Erik is great… one of the smartest guys out there, and he has a very witty sense of humor.  Also, you got to love how he approaches everything like a mad scientist (he is an econ PHD after all).  

I’m glad that he has started blogging, and also glad that he is using Tumblr!

erikstuart:

This post from Valleywag echoes something I’ve been thinking about for the last few days:

“Yahoo’s current stock price doesn’t reflect its underlying business performance, good, bad, or indifferent; it’s a reflection of Wall Street oddsmaking on whether a Microsoft buy will go through, and at what price.”

I generally believe pretty strongly in efficient markets, so I’ve been amused by Jerry Yang’s statements that Microsoft’s bid “substantially undervalues Yahoo”, given that it offered a 60% premium to the stock price at the time of the bid. Unless Jerry had some really amazing inside information – and no, product plans and January’s numbers don’t qualify; I’m talking about something like “Sue Decker took $10B out of the bank, put it on snake eyes, and won” – I think the market’s view of Yahoo’s business value at the end of January is a lot more reliable than that of anyone inside the company. (That doesn’t mean I think Jerry is being silly, by the way. I pretty much expect politicans and executives to lie when they need to, to fulfill their core fiduciary or governmental obligations, and it doesn’t bother me.)

Valleywag puts it on the money, though: YHOO’s price is currently an efficient estimate of the price & likelihood of a MSFT acquisition, which need not have any relationship to the actual value of the standalone business. … which implies several things:

• Yahoo isn’t getting any realistic signals as to how recent events (business results, macro conditions, product launches, etc.) are increasing the value of the company. (E.g., I would have loved to have seen how the market reacted to Yahoo’s test-outsource of ads to Google – but we’re missing that information.)
• MSFT isn’t getting those signals either.
• The longer the parties wait post-bid, the more uncertainty gets injected into the valuation of the business.
• Greater uncertainty probably makes a deal more likely to fall apart.

Add a couple of additional hypotheses:

• Assuming that MSFT’s initial assessment was anywhere close to accurate, YHOO is worth more to it than it’s worth as a standalone.
• Yang’s posturing to the contrary, accepting MSFT’s bid would give YHOO shareholders a LOT more return than they should expect from the business by itself.

Put these together, and it’s clear that a lot of value is being jeopardized by extending this mating dance. In fact, as someone who’s involved with M&A* at an internet company, I’d draw a general implication that, were I involved with a similar deal, I would want to think very carefully about how to make the process go as fast as possible. Public market pricing is a precious source of information, and I’d try to get deals done with the “freshest” information possible.

* Disclosure: I work in corporate strategy at eBay. By the way, I don’t have a strong personal stake in Microhoo either way – I think that MSFT and YHOO are jeopardizing their own value, but I don’t have a clear forecast of the effect of the deal on eBay, positive or negative.