Archive for February 12th, 2008

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Special Report February 12, 2008, 12:01AM EST text size: TT

The Microsoft-Yahoo! Mating Dance

Understanding the ins and outs of the brewing takeover battle requires parsing what each company said—and what each didn’t

Microsoft (MSFT) isn’t happy with Yahoo’s (YHOO) decision to spurn its $44.6 billion takeover bid, but the software maker is going to let Yahoo! live with the consequences a while before applying added pressure.

Microsoft said as much, however politely, on Feb. 11 when it called the offer, extended on Jan. 31, “full and fair.” The remarks came in response to Yahoo’s earlier statement that Microsoft’s bid “substantially undervalues” the company. The interchange is part of a delicate dance that, while cordial now, could soon turn hostile. “The process is following a reasonably well-known mating ritual,” says Joseph Grundfest, a Stanford Law School professor and former commissioner of the Securities & Exchange Commission.

To understand the process, it’s important to parse each company’s statement for what has been said and, just as important, what hasn’t. For example, Yahoo’s statements suggest there is a price that fairly values the company and ostensibly would be acceptable. Microsoft just hasn’t hit that number yet.

Passing the Buck to the Board

Importantly, Yahoo says it’s the company’s board that believes Microsoft’s bid undervalues it. The company didn’t say bankers or legal advisers feel that way. It leaves open the question whether the bankers at Goldman Sachs (GS), Lehman Brothers (LEH), and Moelis & Co., which are advising Yahoo, concur. The same goes for Yahoo’s attorneys at Skadden, Arps, Slate, Meagher & Flom.

What’s more, nowhere in Yahoo’s release does the company describe Microsoft’s offer as “inadequate.” That’s a key word, loaded with legal meaning that in mergers-and-acquisitions-speak could torpedo the deal. Instead, the company said only that “the proposal is not in the best interests of Yahoo and our stockholders.”

There’s even a line in the Yahoo statement that could suggest the company is ready to sell if Microsoft ups the ante. Yahoo says the board remains “committed to pursuing initiatives that maximize value for all stockholders.” That could be an invitation to increase the offer, something many analysts expect Microsoft to eventually do.

Reserving the Right to Go Hostile

There’s some parsing to do with the Microsoft statement as well. In its statement, Microsoft says it’s “unfortunate that Yahoo has not embraced our full and fair proposal.” That suggests Microsoft isn’t interested in offering more, at least not yet. Without any competitive offer or any alternative plan from Yahoo, there’s little need to rush on that point.

What if Yahoo does nothing? Well, Microsoft says it “reserves the right to pursue all necessary steps.” Of course, that’s the threat of going hostile. That means taking matters directly to shareholders. To do so, Microsoft would most likely file an exchange offer with securities regulators that outlines its stock-and-cash bid for Yahoo. That’s made more difficult by Yahoo’s “poison pill” defense, which gives shareholders the ability to buy stock at a significant discount if an unwanted bidder buys 15% or more of its shares.

To get around that, Microsoft would also have to replace the majority of Yahoo’s board with a group that wants the deal. That takes a proxy fight. Microsoft would have to nominate a slate of directors to be voted on at Yahoo’s annual meeting. According to Yahoo bylaws, shareholders can submit matters for the meeting any time from Feb. 13 to Mar. 13. Last year’s meeting was held in June.

There’s still time before Microsoft needs to go that route. If Yahoo is indeed just looking for more money, Microsoft certainly has the financial wherewithal to pony up. And that too is standard operating procedure in corporate courtship. “If the telephone call doesn’t work, you send flowers. Then you send candy,” Stanford’s Grundfest says. “And if that still doesn’t work, you might suggest that you are carrying a gun. But the question then is whether you are willing to pull it out and whether it is indeed loaded.”

Greene is BusinessWeek‘s Seattle bureau chief.

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Media February 7, 2008, 5:00PM EST text size: TT

Generation MySpace Is Getting Fed Up

Annoyed with the ad deluge on social networks, many users are spending less time on the sites

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If you want to socialize with Chris Heritage, you won’t find him on Facebook. The 27-year-old Port St. Lucie (Fla.) business analyst joined the social network last year after his buddies bugged him to get an account. But he soon became fed up with the avalanche of ads, especially those detailing what his friends were buying, and he quit the site in November. Now, Heritage expresses himself through a blog, happy to pay $6 a month to publish on a promo-free Web site. “It’s worth it to not have to look at the ads,” he says.

Uh-oh. Social networking was supposed to be the Next Big Thing on the Internet. MySpace, Facebook, and other sites have been attracting millions of new users, building sprawling sites that companies are banking on to trigger an online advertising boom. Trouble is, the boom isn’t booming anymore. Like Heritage, many people are spending less time on social networking sites or signing off altogether.

The MySpace generation may be getting annoyed with ads and a bit bored with profile pages. The average amount of time each user spends on social networking sites has fallen by 14% over the last four months, according to market researcher ComScore. MySpace, the largest social network, has slipped from a peak of 72 million users in October to 68.9 million in December, ComScore says. The total number of people on such sites is still increasing at an 11.5% rate, but that’s down sharply from past growth rates. “What you have with social networks is the most overhyped scenario in online advertising,” says Tim Vanderhook, CEO of Specific Media, which places ads for customers on a variety of Web sites.


Advertising on social networking sites is growing fast. Last year global ad spending on these sites shot up 155%, to $1.2 billion, says researcher eMarketer. This year, eMarketer expects it to jump 75%, to $2.1 billion. During its Nov. 4 earnings call, News Corp. (NWS) gave an upbeat forecast for Fox Interactive Media, which includes MySpace.

But the forecasts for torrid growth may prove unrealistic. Besides the slowing user growth and declining time spent on these sites, users appear to be growing less responsive to ads, according to several advertisers and online placement firms. If advertisers can’t figure out how to reverse these trends, social networking could end up as a niche market in the online ad world, smashing hopes and valuations across Silicon Valley.

The current strength in advertising on social networks may be exaggerated by guaranteed ad deals and hopeful experimentation. Google (GOOG) and Microsoft (MSFT), in hot competition with each other, promised a number of sites a minimum amount of advertising revenue in exchange for the exclusive right to place ads on those sites.

But the early results from those deals are mixed. On Jan. 31, Google said it didn’t generate as much revenue from social networking ads as expected. Google, which has a $900 million guaranteed deal with MySpace for placing ads alongside search results, says existing ad approaches aren’t working well on social networks so far. “I don’t think we have the killer, best way to advertise and monetize social networks yet,” said Google co-founder Sergey Brin.

When News Corp. reported its earnings, it said revenues for Fox Interactive Media surged 87%, to $233 million. But $62 million of that came from Google’s guaranteed deal with MySpace. It’s unclear whether Google, which ad experts believe is losing money on the deal, will sign similar agreements in the future.

Another big slug of ad revenue is coming from companies experimenting with social networks because they are such a popular new medium. But for some, the results have not been encouraging. Many of the people who hang out on MySpace, Facebook, and other sites pay little to no attention to the ads because they’re more interested in kibitzing with their friends.

Social networks have some of the lowest response rates on the Web, advertisers and ad placement firms say. Marketers say as few as 4 in 10,000 people who see their ads on social networking sites click on them, compared with 20 in 10,000 across the Web. Mark Seremet, president of video game publisher Green Screen, stopped advertising on MySpace last spring because of a 13-in-10,000 response rate. “It’s really hard to make money on that anemic click-through rate,” says Seremet.

MySpace and Facebook recognize the issue but say increased targeting and other innovations will spur users to pay more attention. Last fall, both rolled out programs allowing marketers to pitch products to people in hundreds of categories of interest, such as fashion and sports. News Corp. President Peter Chernin said on Feb. 4 that response rates on MySpace improved as much as 300%. Owen Van Natta, chief operating officer at Facebook, says there will be more experimentation in the future. “There’s so much innovation that needs to happen,” he says.

But there’s a catch-22: More aggressive ad programs can lead to more frustrated users. Ryan Lake, 34, just left MySpace because of the ads. “There are so many, and they are getting more and more obtrusive,” he says.

Facebook, the second-largest social networking site, which continues to grow rapidly, introduced an ad program in November, called Beacon, that alerted users to the purchases of friends in hopes of spurring sales. More than 75,000 Facebook members signed an online petition against the effort. Carol Kruse, Coca-Cola’s (KO) vice-president for global interactive marketing, says that while she thinks social networks present a big opportunity, Coke is avoiding Beacon for now.

MySpace has had complaints, too. Nina Pagani, a 20-year-old New York student, grew furious last year when MySpace began automatically posting on users’ home pages notifications of friends’ favorite products. “Your personal MySpace page became an advertisement,” she says. Pagani, a five-year MySpace member, deleted her account in December. “It caused too much drama in my life,” she says.

Ante is Computer Editor for BusinessWeek . Holahan is a writer for BusinessWeek.com in New York .

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