Great White North Prognostications

Interesting. Needless to say Microsoft being the buyer causes my stock to drop. Basically 3 bucks per share. But If I didn’t own it before now I would be buying it. But there is a catch. The Yahoo yahoos are balking. But there ship was sinking somewhat so I am not sure exactly what they are complaining about. I could be wrong but I suspect that they are holding out for some more dough. The key piece of knowledge would be to know where the strike price for any options held by the key people at Yahoo stands and how this strike price compares to the MS offer. If MS has to sweeten the pot with an extra few gold pieces per share then my little MS investment will drop. If Yahoo about faces and cooperates then my investment will rise. The board of directors might make a play. I have no idea what kind of board Yahoo has.

But more importantly is Google’s take on this. There share price directly reflects why they are protesting this merger. Right now there is only one game in town and that is adsense and it is Google’s primary game. Yahoo ads and whatever it is that MS offers have not held up to the powerhouse that is Google Adsense. But now investor types have realized that MS might have a chance to eat some of Google’s pie. Thus the plummet of Google’s share price.

But having an identical Yahoo ads running head to head against Google Adsense does not make complete sense for either company. There are two reasons for this.  The ad programs are an auction format. Basically the highest bid for an ad slot wins. There are two major factors that drive this price and the total revenue. The number of bidders drives the peak prices up as well as creating a volume of revenue. But the number of sites displaying the ads also drives the interest of the advertisers as this wonderful directed ad model will generate revenue for the advertiser.

But to have two companies neck and neck doing the same thing will reduce the peak amount bid for any given ad space. I suspect that this peak amount is much lower than having a single provider as is now the case. But also it weakens the effectiveness of the ad system itself. Thus making the ads less targeted and so on. But there is a third factor. The hosting sites for these ads. These sites will chose the system that provides the most bucks. So what happens in this situation you end up with one of these two companies building a more liquid market where any advertiser will find a medium to display their ad and the media hosts will find advertisers that want to advertise. Once you have a critical threshold of this liquidity you have won and the other has lost.

An example of this liquidity effect would be ebay.com. You could build the best damn auction site in the world tomorrow but you are missing the key ingredient that would interest anyone who might use your new awesome site to sell their junk. Bidders. And thus the bidders are not interested as you have nothing for sale. Thus your best damn auction site will probably sit gathering dust in some corner of the internet.

But far worse than this diluting of revenue and profits you also get the problem of two companies each of whom has more cash than most humans can truly understand. These two companies if so motivated to go to war have cash reserves that will seem inexhaustible. But actually they are exhaustible. It would be easy to do all kinds of financial shenanigans to win customers. But in this case MS is the better equipped to win this war. Any money that Google spends on this war will end up hurting their bottom line in an obvious way. But MS has other major products to draw from such as Windows and Office. The accounting of any war would not necessarily look as bad for MS and thus their share price would hold up longer both due to MS’s ability to conceal the war using accounting tricks plus investors would know that even if MS loses this war they can retreat to what they presently do. If Google were to lose this war they could be in very serious trouble.

But even MS could end up damaging itself in other ways. Win or not they would end up focusing on this whole Yahoo thing which could distract them from three core problems they have now. One is they need a replacement for Vista and they need it now. WinMin (their cool new idea) looks good but is years out. Office 2007 is a sitting duck and needs some serious spice if it is to hold out against OpenOffice. And thirdly MS has to keep innovating with radical new ideas such as this virtual machine business along with very hard stuff like parallel processing. If they don’t focus on these three issues the long term health of the company is in jeopardy.  Plus Google is not the only issue nagging at MS. Linux is eating their server business. MySQL with SUN will do more damage to their SQL server and there is always the risk that Linux could come up with a desktop that actually works.

There are three possibilities to consider with my MS investment.

• The Yahoo deal falls apart. The stock will take a minor hit but will get back on track.
• MS has to sweeten the deal to win and my stock takes another hit but quickly recovers.
• MS and Google start a war that will get going quickly and this will only hurt both companies but mostly Google share prices as they have no real upside to this war except to avoid death. If MS wins OK if they lose not as OK.

Thus the smart thing might be toss my MS stock overboard and wait until they either conclude the Yahoo deal or shortly after it dies and they repurchase the shares. But I think I will be stupid here and hold on to them as I would be losing $100,000 and that sucks. The other lesson here is that Google shares are going to be very iffy for a while. If MS gives up then Google shares might take a nice happy jump of 15-20% so a quick in and out might be called for if the writing is on the wall for MS to drop this takeover.

Basically the whole thing hinges on who at Yahoo can benefit from what share price. Find this out and the future becomes crystal clear.

This entry was posted on Monday, February 4th, 2008 at 8:30 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.