ANALYSIS: Yahoo's response to Microsoft's ultimatum wasn't a full smackdown, but it should at least stop the deal-momentum that Microsoft grabbed over the weekend. Yahoo did not say "we had a great Q1, and we're raising our full-year guidance," which would have completely neutralized the Microsoft attack, but it did make Yahoo's position look more reasonable and make it seem that Microsoft was playing fast and loose with the facts. If nothing else, the response should buy time until Yahoo reports Q1.
In terms of being able to stave off Microsoft, time helps Yahoo here. If the company's business is not deteriorating, more time gives it the chance to iron out a strong merger deal with AOL (see below) and, importantly, gives Microsoft shareholders and employees who hate the deal more time to be heard.
The details of Yahoo's Q1 and full-year outlook will be critical: If the results are strong, Microsoft will have to raise its bid or abandon the deal. If the results are weak, it's likely game-over.
See Also: Note: Yahoo Did Not Say "Shareholders Support Us" or "Q1 Strong"
THE PARRY: Yahoo (YHOO) publishes its response to Microsoft's threat (MSFT). Key points:
Our business is in line with our previous forecasts (contrary to Microsoft's assertions). This is not news, and it is not nearly as powerful a statement as it would have been if Yahoo had said our business is "ahead" of previous forecasts. However, it's better than missing.
We are not opposed to selling to Microsoft at a higher price. This is obviously designed to address the charge that Yahoo has a patholigical block against selling to Microsoft.
Contrary to Microsoft's assertions, our new three-year financial plan "has received positive feedback from our stockholders." This is weak. Of course shareholders reacted positively to the plan. But that's all it is--a plan. Microsoft is offering cash.
You mischaracterized our discussions in your letter. This one is strong. "Steve, you personally attended two of these meetings and could have advanced discussions in any way you saw fit." Translation: We're the reasonable and honorable ones here. You're distorting the truth to try to scare our shareholders into caving. They--and we--deserve better.
We have asked you for anti-trust information that you have refused to provide. Translation: Again, we're the reasonable ones here.
We're happy to sell to you, but we're not going to allow you to steal the company. Again, strong.
The only truly meaningful point here is the first one, and until we get hard details on the first quarter and full-year outlook, it's hard to know for certain where things stand. As we said on Saturday, we think Yahoo's only escape from Microsoft's ultimatum is to have posted a strong first quarter and raise its outlook for the rest of the year. This would bolster Yahoo's argument that it is worth more, especially since the stock market and Google have bounced off its recent lows. It would also make it very difficult for Microsoft to cut its bid and still have Yahoo shareholders take it seriously.
Meanwhile, the Post says Yahoo is still negotiating seriously with AOL about a deal in which Time Warner spins AOL into Yahoo in exchange for 20% of Yahoo's equity. This would make great sense, and the companies should have done it six months ago. The only way the move will help stave off Microsoft, however, is if Yahoo's own performance is strong.
