Time's On Microsoft's Side In The Yahoo Conflict

Steve Ballmer finally got tough with Yahoo after several weeks of playing nice. (My summary of the letter: "You understimate the power of the Dark Side!") Yahoo fired back with a response that shows they're ready to rumble. It seems to me that the longer this goes on, the worse off Yahoo will be.This back-and-forth between Yahoo and Microsoft reminds me of another event that's in the news lately: the collapse of the housing market. After a decade of unsustainable price increases, the housing bubble burst. Now the unthinkable is happening: prices are going down. The problem is that sellers aren't willing to accept that prices are going down.

And so it is with Yahoo. Microsoft gave a 62% premium on Yahoo's stock price at the time of the offer. Had that offer not arrived, it is almost certain that Yahoo's stock price would be drifting lower still. Take a look at Yahoo's two-year trend and tell me this is a company on the rise. The United States is clearly headed into a recession, if not there already; Yahoo's prospects for clawing its way up in a down market don't seem too realistic.

Perhaps Jerry Yang's defiant "We're worth more than your offer" reply to Microsoft is covering for the real reason: He'd rather go down fighting than let Microsoft's dingo eat his baby. Or perhaps he's like that homeowner who can't believe that prices really are going down. The people that Yang really needs to convince are Yahoo's shareholders. Before the Microsoft offer, the falling stock price says those folks didn't have confidence that Yahoo's management team could do the job.

The whole deal still seems like a train wreck to me, but if it's going to go through, the worst thing Microsoft could do would be to overpay for Yahoo. The longer this goes on, the clearer it will be that, if anything, Microsoft's offer is too generous. That will send Yahoo shareholders scrambling to make this deal happen as soon as possible, before Microsoft comes to its senses.