Microsoft may bid higher to clinch it?

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Blodget agrees that buying myspace is a bad idea for Yahoo.

That is all for now.

News Corp wants to dump Myspace into Yahoo

Talk about a poison pill.

On their last quarterly call, Google basically said they can't monetize social networking properly. They specifically meant Myspace where Google signed a billion dollar deal to provide lump sum payments to News Corp for the right to provide search results from within Myspace and serve advertising to their customers. They pretty much said it's been a bad deal for them.

I don't see how it'd be a better deal for Yahoo. Yahoo can't even monetize their own base properly.

It would be a great disservice to shareholders were Yahoo to move forward with a deal like this. I would imagine they would get blocked.

Yahoo stock is bid up on this, I suppose on the notion that Microsoft will have to pay higher to secure the deal. I disagree. I think if this is the best Yahoo can come up with, Microsoft is going to walk away with the company at $31.

A higher price on Yahoo's head

Yahoo thinks they're worth more like $40. That was probably the right price a year ago. It's also a price Microsoft will probably pay. People talk about Yahoo like they're desperate, like this is the only shot Yahoo shareholders have to get paid... but frankly, in some ways Microsoft is as desperate. They've got a virtual monopoly in PC operating systems and the PC market just isn't a growth market like it used to be. Microsoft has lost more share in the last several years than Yahoo presently has.


This is a snapshot of that share loss (click on pic to be able to actually read it):



Yahoo has an enormous user base -- 248 million users at last count (though I'm sure there's quite a bit of phantom accounts in that number). And those of us who are still using my.yahoo are reluctant to make a change as it means a dreaded email address change (I wonder how long it will take before email address portability will become a requirement in the same way phone number portability is a requirement for telcos now). For the most part, the user base is somewhat stagnant -- it's not a growing property. Yahoo also comes with the #1 search engine in Japan and a sizeable stake in Alibaba.

Microsoft is also not going anywhere growth-wise in online. They pretty much lose share the moment a user figures out how to change their homepage from msn.com.

It's been suggested in the press that Yahoo will wind up the controlling entity post-merger. Uhh. Their management has been awful. They've been squandering market leadership practically the entire time Semel has been in charge. They desperately need to bring in some outside talent to run the post-merger company.

Microsoft's big hook is its operating system and desktop apps. On the land of the desktop they're an unending storm, but in the internet cloud they're just an occasional drizzle.

Yahoo should sell to Microsoft. Microsoft needs to buy them. This deal probably won't fix either company's problems monetizing online. It's more likely that Microsoft will find themselves with 6% share of the search market in 10 years (down from 30% post-Yahoo deal close) and wonder how they messed it up all over again.

Rackable Systems (RACK): Between a Rack and a Hard Place

From the Rackable Systems most recent 10Q:

Revenue from customers representing 10% or more of total revenue was as follows:
		Three Months Ended								Nine Months Ended
		September 29, 2007				September 30, 2006				September 29, 2007				September 30, 2006
Customer A			29	%			28	%			31	%			31	%
Customer B			*				22	%			14	%			28	%
Customer C			21	%			*				15	%			*
Customer D			11	%			*				*				*

* = under 10%

Two of their top 3 customers are Microsoft and Yahoo and those capex budgets have to be in stasis, though Yahoo did throw out a capex number of up 10% y/y after they reported but before Microsoft swooped in for the kill. Since the deal's been announced I'd imagine there's quite a bit of confusion internally at Yahoo and approved purchase orders will be hard to come by near-term.

Stock is cheap, trading at a discount to book. They do low profile, shielded servers. Rack space is expensive and the less heat servers throw off and the smaller they get the better. Dell has recently turned up the pricing heat on them and margins have collapsed in recent quarters. I doubt anything has changed with respect to pricing being tough.

I've always suspected Rackable will be acquired by Dell at some point – it'd be like a revenue buy. Dell could very easily remove a competitor and leverage their vast supply chain power to improve Rackable's profitability significantly.

It's probably a buy after the quarter on the theory that it can't get a lot worse looking for them and the stock reflects a lot of risk already.

A bigger buncha Yahoos

Semel left. That's obviously an admission that his position was indefensible.

The company is talking about getting out of music. It wasn't working particularly well anyway.

The private equity plan (if there was one) would have to be spin off the media assets to a larger entity (NBC Universal has been floated as a possible buyer) and outsourcing of the search business to Google (which would be great for margins but lousy for revenues). Alibaba and Yahoo Japan already have "exit" paths as they're publicly traded vehicles.

The media is dismissive of another large media buyer as most of them have their hands full and Yahoo is a whole mess of distraction for most of them.

The net of it is that Google is the big winner in almost any scenario here. If the deal takes forever (which it will), they look like a safe port in the storm. If the private equity scenario goes through, that's all win for them. If the deal doesn't happen, Yahoo and Microsoft will have been dissected to the point that it will be clear Google is the better choice.

Blodget is all over this and thinks Microsoft takes Yahoo uncontested and that the deal will be a disaster over time. His blog on this subject is extensive and covers all the bases.

First takeover bid for Yahoo

Microsoft bids $31 a share for Yahoo. In months past, they were a rumored suitor... at much higher prices. Semel also stepped down from the board. I doubt Yahoo goes to the first bid. It's a valuable media property with a stagnant market share. There have to be other parties interested in it.

Though fundamentals stink, the stock is going to have a bid underneath and I would be shocked if investors don't speculate about other suitors or even a sweeter Microsoft bid.

Yahoo Q4:2007 Results

Yahoo reports revenues a touch light with operating income 10% better than estimates. They guide the full year 2008 revenues ex-tac (traffic acquisition costs) to a range of 5.3 - 5.8 billion with the street using a "soft" number of 5.8 billion. Their operating income guidance looks downright lousy. The stock was telegraphing numbers coming down -- look at the sickly chart (click on it for a close-up).



They're still in a lot of flux. The old guard must go but they won't unless they're forced out. It's a very valuable media property in terms of market share and user base. The question is how low does the stock price have to go to force large media companies to buy a fixer-upper. It's not going to be easy to hold onto through the bonfire of the vanities to come. The problem with a story like this is the stock needs to get beaten up for something good to happen for shareholders... it's bad but I can't tell you exactly when it's bad enough. There's probably easier places to make money than here.

Pass.