All Things Digital

Looks like Microsoft’s on-again, off-again, on-again pursuit of Yahoo is off-again, this time for good. Perhaps. Microsoft Chief Financial Officer Chris Liddell told Microsoft investors assembled for an annual day of presentations Thursday that “the chances of us buying Yahoo on a full acquisition basis are so small that they are essentially negligible. … We took the view and we still take the view that Yahoo is essentially a declining asset. We made a credibly generous bid with a very high premium because we were looking for speed.”

And, as Microsoft (MSFT) CEO Steve Ballmer noted later on in the presentation, negotiations between the two companies were anything but speedy.
“It is a little weird,” he said. “We had an offer out that was a 100-percent premium on the operating business of the company, and there wasn’t a serious price negotiation … until three months later.” And then, to make it perfectly clear that Microsoft is no longer interested in acquiring Yahoo, Ballmer added: “We’re done, we can move on.”

Or can they? Because to that definitive statement on the Yahoo (YHOO) issue, Ballmer quickly added this caveat: “Does that mean that nobody will ever talk to anybody again? I suspect that the answer to that question is also no. It’s a long time and a big world.”

Well, look who missed analysts’ expectations by a penny. Microsoft. Though the company Thursday reported 18 percent in revenue growth and 21-percent growth in earnings for its fourth quarter, its 32-percent growth in per-share earnings didn’t quite meet Wall Street expectations. Investors wanted per-share earnings of 47 cents. Microsoft (MSFT) gave them 46 cents.

The one-cent discrepancy has played havoc with the company’s share price, knocking it down to near-Yahoo (YHOO) levels. “Clearly, we’re disappointed that our strong financial results are not reflected in our stock price,” Microsoft CFO Chris Liddell told financial analysts during the company’s earnings conference call. “The 18-percent revenue growth rate represents our fastest growth in over a decade [and] we’re confident we can continue to produce double-digit growth.”

Microsoft CFO Chris Liddell said last week that “speed is of the essence” in completing a deal to buy Yahoo.

So why is it taking the company so damn long to respond to Yahoo’s latest stonewalling of its advances? Three days have passed since the expiration of Microsoft’s deadline for Yahoo to accept its buyout offer or face a possible tender offer and proxy battle. And we’ve heard not word one from Microsoft (MSFT), which had–up until Saturday–lobbed threats at Yahoo (YHOO) nearly as often as it issues security bulletins for Windows.

Well, that may soon change. People close to Microsoft tell CNBC that the software giant is girding itself for a proxy fight. And CNBC, noting a sudden upward trend in Yahoo’s share price today, speculates that Microsoft may launch its opposition slate of directors as soon as tomorrow.

Or it may not. A source with knowledge of the situation tell BoomTown that Microsoft may make good on its threat to scrap the deal. “I would not have said this yesterday,” the source said. “But I would not be surprised if they walked away rather than waged war.”

Microsoft may have fallen short of expectations for third-quarter sales, but it met and exceeded them for color commentary on the Yahoo deal.

On a post-earnings conference call this afternoon, Microsoft (MSFT) CFO Chris Liddell said Yahoo (YHOO), which insists Microsoft’s $31-per-share hostile offer “massively undervalues” it, has “unrealistic expectations” about its worth. “Our initial offer was extremely generous, more than a 100% premium for Yahoo’s core business, and our view on value is shaped by the long-term value of the company, and we intend to remain disciplined in our approach,” Liddell said. “The strongest argument that I’ve heard on why we should increase our bid–simply that we can afford to–is not one that I favor. We’ve yet to see tangible evidence that our bid substantially undervalues the company. In fact, we see the opposite. Yahoo continues to lose search share, and profitablity continues to decline year-on-year.”

It sure does. Yahoo’s operating income for the first quarter of 2008 was $121 million–a 28% decrease compared to $169 million for the same period of 2007. But then, Microsoft doesn’t want Yahoo for its profits; it wants it to make its own advertising platform more successful. Is that worth more than $31-per-share? Liddell clearly doesn’t seem to think so. “Unless we make progress with Yahoo toward an agreement by this weekend, we will reconsider our alternatives,” he said. “We will provide updates as appropriate next week. These alternatives clearly include taking an offer to Yahoo shareholders or to withdraw our proposal and focus on other opportunities, both organic and inorganic.”

March 13 is the deadline for Microsoft (MSFT) to nominate its own slate of directors to Yahoo’s (YHOO) board. But it really should be the 15th, shouldn’t it? Because the Ides of March would be a far more appropriate date for such a boardroom bloodletting, if that’s what Microsoft intends.

And it seems likely that it does. BoomTown reports that the software juggernaut has been trolling Silicon Valley for board candidates. And according to Microsoft’s leadership, the two companies aren’t really talking much these days–at least formally, anyway.

“No one asked me about Yahoo, which is interesting,” Microsoft CFO Chris Liddel said during the Morgan Stanley Technology Conference this morning. “It’s a small company we are looking to acquire, but the company has not yet formally responded to our offer. … We will continue to look at our options and that is something I am incredibly systematic about.”

It’s a small company we are looking to acquire. Heh.

Putting in a pre-show appearance at the CeBIT technology fair in Germany today, Microsoft CEO Steve Ballmer was equally cagey about the company’s Yahoo strategy moving forward. “We still think the deal makes sense with the price and structure that we announced and we hope that over time that becomes a reality, and we’re working toward that,” Ballmer said. “There’s been a range of dialogue and there’s a range of alternatives being considered. … We think there’s a lot of merit in the deal for Microsoft, for Yahoo, for their shareholders … consumers and advertisers. We are trying to have appropriate levels of engagements with those three constituencies.”

No surprises here. The incredulity with which the industry views the $15 billion valuation given Facebook after Microsoft’s investment in the site does not extend to the offices of Microsoft Chief Financial Officer Chris Liddell. And why would it, when the consequences of not toeing the party line at Microsoft are likely being hanged from it by the neck until dead?

So in an interview with the Seattle Post Intelligencer, Liddell spent a fair bit of time defending Microsoft’s investment in Facebook and the company’s metastasizing valuation, though he surely knows as well as anyone that to be worth $15 billion, Facebook would have to generate about $2.5 billion in revenue in three years.

Obviously, I feel comfortable with the transaction we’ve done, and I was involved in it. I think you have to look at the investment not only in the context of the dollar investment but the commercial transaction. I think there’s a great example of finance taking a role in that and thinking about the holistic aspect of what we’re trying to do in the online services, how Facebook fits into it, and how a dual investment-commercial transaction is a very powerful way of creating a partnership.

“So I’m really comfortable with the overall transaction. The $15 billion number is a big number. But can I see realistic scenarios where the company could be worth more than that? Yes, I could. It’s a big call, but it’s a very good one strategically. … It’s a great example of where some of the creative thinking of the business and finance people collectively came to a result which was very good.”

About what you’d expect him to say, right? Except for that one bit about scenarios in which Facebook might be worth more than $15 billion, which is a little, you know, frightening.

Lest there be any doubt that there is a bubble in the online advertising business, consider Microsoft’s planned purchase of aQuantive. After losing DoubleClick to Google, Right Media to Yahoo and 24/7 Real Media to WPP, Microsoft offered a jaw-dropping $6 billion in cash for aQuantive. That’s $66.50 a share–an 85% premium over the previous day’s selling price and about 14 times aQuantive’s 2006 revenues of $442 million. It’s also a hell of a lot more than the $3.1 billion Google paid for DoubleClick–10 times its $300 million revenue–which Don Dodge, the head of Microsoft’s emerging business team, criticized as being “way out of line” when it was first announced. Wonder how he feels about aQuantive’s $6 billion purchase price.

Regardless, Microsoft’s not sweating it a bit. “We’re happy with the price we paid. We believe it’s exactly the right company to buy, so we’re willing to pay the value we are paying today,” said company CFO Chris Liddell during a call with analysts today. “We will use the strength of our balance sheet when we think it’s necessary to drive growth going forward. This deal takes our advertising business to a new level. This allows us to take a bigger piece of that $40 billion pie that is still growing.”