Why Bartz Won’t Sell Yahoo! (Just Yet)
Microsoft want Yahoo! Search… All of it.
It is no secret that Microsoft wants this business, and those who have been in the industry will recall previous attempts, most significantly the shennanigans of 2008, which saw an unsolicited proposal to buy the whole Yahoo! business in February of that year, for $44.6 BN dollars in cash and shares. Following the rejection and counter-position of the offer from Yahoo! to $53 BN, (equivanlent to $33 a share and almost double the then shareprice) Steve Ballmer, in a letter to Jerry Yang, announced Microsoft were pulling out of the offer and would not be willing to meet the asking price.
Later that year an opportunist alliance between activist investor Carl Icann and Microsoft, saw yet another unsolicited bid; this time for the search business only, under the terms that Icahn would depose the board of directors for the remaining Yahoo! business and install a new board of directors under his leadership. Chairman Roy Bostock issued a statement resoundly rejecting the proposal (which was issued with a 24 hour response deadline) on grounds that a carve-up of the business would be damaging and undervalued the company’s assests. Again the “buy the whole company for $33 dollars a share or get lost” message was loud and clear.
Since these events in 2008 there’s been a lot of change for both organisations. Discussions with Google opened up over a deal to power the Yahoo! search business (blocked by US anti-trust regulators). Jerry Yang stepped down at Yahoo! to be replaced by Carol Bartz in January 2009, and of course Microsoft unleashed Bing with a bang. Rumour, speculation and Icahn cutting his stake by 80% have added grist to the mill in every which way.
One message remains clear: Bartz “will sell at the right price”.
Whilst I agree with Laurie, that a sale is just a matter of time, I wanted to look at the current search partnership terms and why a sale may not be on the agenda for some time. Whilst we do this, keep in mind that as Bartz recently stated, the search business “is 40%” of Yahoo! global business.
The recently approved distribution agreement sees the two web giants join forces in the following ways…
- Yahoo! will cease to continue it’s own core search technology and will instead use the Microsoft/Bing search technology
- Yahoo! will provide the sales team for paid search advertising for both
- AdCentre will be the supporting platform and self-serve advertisers will be migrated
- It’s a 10 year deal
- Yahoo! get 88% revenue share (from paid search advertising revenues) for 5 years
- Yahoo! get $150 million from Microsoft to cover migration costs
- Yahoo! retains some element of control over search results and the SERP
So Yahoo! get a significant element of the migration costs covered, though given Q4 09 total revenues were $1.73 million and “advisory and retention costs” associated with the Microsoft deal were $32 million for the same period; this does seem to be some way off.
In terms of Yahoo! current financial position a great deal of marketing services revenues are attributed to affiliate websites (search and advertising partner networks). According to the Q409 press release, of the $5674 million dollars of marketing services revenue in 2009, $2121 million (37.4%) of it was attributable to affiliate websites; but with affiliate revenue generation comes TAC.
TAC, or traffic aquisition cost, can be understood as revenue share, or affiliate share of such marketing services revenues; however when referenced in earnings releases, is referred to as TAC. Due to the nature of distribution partnerships TAC is a cost that tends to rise year on year and in a situation of declining search marketshare, that means declining profits. Although it is impossible to extract search marketing as a componant of “marketing services” revenues, Yahoo! do point out that declining revenues for Q4, were driven by a 15% decline in the search marketing componant. Additionally, when total revenues for 2009 were $6.4 million, TAC, at $1.7 million was 27.5% of that, and an increase of 2.5% on 2008. This is a year when total search revenue and market share declined.
Although Bartz’ statement that search is “40% of the business” is rightly vague, if we imagine that (just to illustrate) this means 40% of total revenues are from search, then that’s $2.584 million. If we then extrapolate the 27.5% TAC (assuming it is equally distributed over search and display componants of “marketing services” revenues), then that’s $1.873 million to then extract costs, such as staff, platforms, development etc. Assuming the Microsoft advertising product monetizes exactly the same as the current Yahoo! product, Yahoo! taking 88% of total revenues for this period would mean retaining $2,274 million before costs; such costs of course being significantly reduced given there will be less staff, no platform for support and no product to invest in.
Whilst the writing is clearly on the wall for the Yahoo! search business, this deal will unlock profit efficiencies and see a healthy income stream to Yahoo! that will mean Bartz is in no rush to sell. Microsoft however; must be able to deliver increased market share, and tangible inroads on Google’s search dominance. If they fail to deliver, the Yahoo! deal could in effect be a ten year old albatross around Ballmer’s neck.