Microsoft News Tracker

The soap opera continues as Yahoo announced that the second round of talks with Microsoft have ended because a) Microsoft no longer wished to acquire all of Yahoo and b) Yahoo did not want to sell only its search business which Microsoft did want. Can this be the end of Microsoft’s involvement in the continuing travails of Yahoo? Unless Carl Icahn miraculously wins his Yahoo proxy fight and comes knocking on Steve Ballmer’s door, the answer is hopefully yes.

Update: Microsoft’s statement basically confirms the above and says they are still willing to discuss Microsoft’s proposed "alternative transaction."

Update: The other shoe drops - Yahoo! to Strengthen Competitive Position in Online Advertising Through Non-Exclusive Agreement With Google:

The agreement will enable Yahoo! to run ads supplied by Google’s AdSense for Search and AdSense for Content services next to Yahoo!’s internally generated paid search and algorithmic search results. Yahoo may also run Google-supplied ads on non-search Yahoo web properties, as well as on current members of its partner network. The agreement has a term of up to ten years: a four-year initial term and two, three-year renewals at Yahoo!’s option. It applies to Yahoo!’s operations in the U.S. and Canada only. Advertisers will continue to pay Yahoo! directly for clicks served by Yahoo! from Yahoo!’s Panama and Content Match marketplaces. Advertisers will pay Google directly for each click on Google paid search results appearing on Yahoo! owned and operated network or certain affiliate sites. Google will share a percentage of such revenue with Yahoo!.

In addition, Yahoo! and Google agreed to enable interoperability between their respective instant messaging services, bringing easier and broader communication to users.

The agreement allows either party to terminate the agreement in the event of a change in control of either party. The agreement also requires Yahoo! to pay a termination fee if the agreement is terminated as a result of a change in control that occurs within 24 months. The termination fee is $250 million, subject to reduction by 50 percent of revenues earned by Google under the agreement.

Although Google and Yahoo! are not required to receive regulatory approval of the deal before implementing it, the companies have voluntarily agreed to delay implementation for up to three and a half months while the U.S. Department of Justice reviews the arrangement.

Yahoo gets to choose the search/content terms where Google ads will appear, but expects to pick enough to realize "an approximately $800 million annual revenue opportunity" with "$250 million to $450 million in incremental operating cash flow" in the first 12 months. Sure it’s embarrassing that Yahoo’s vaunted Panama system can’t monetize their own properties as well as Google, but cash is cash.

MSFTextrememakeover is shutting down his always interesting blog and by way of a farewell present provides a lengthy valedictory post about all the things that are wrong with Microsoft from a shareholder’s perspective - Eight Years of Wrongness:

For example, I bought my first MSFT shares back in the early 90’s. Like most holders that decade, I did very well. Then came this one, which has been an absolute disaster.

It’s sobering to realize that during Ballmer’s term as CEO, MSFT has underperformed almost all of its top tech peers (including AAPL, IBM, HPQ, SAP, INTC, CSCO, SYMC, NOK, ORCL, ADBE, RIMM, QCOM, Ebay, and AMZN), and badly lagged the major averages. We may even see our third plunge to test the 2000 lows during his watch. Unbelievable. There may be another major technology CEO with an equivalent or worse track record who is still in power, but a name doesn’t come readily to mind. Indeed, it’s instructive to note the four companies who didn’t make my list above: DELL, YHOO, Sony and Sun. In other words, four well-publicized flameouts/turnaround stories (depending on your perspective), all of which have new CEOs. Go figure.
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So it’s time for me to listen to the fat lady who has been singing for years now, and finally pull the plug. I can’t keep waiting another 11 years for MSFT’s leadership to deliver the returns that say AAPL’s have in just the past 12 months …

What follows is a lengthy dissection of Microsoft’s business which may be briefly summarized as Microsoft has become a bloated bureaucracy throwing money and people at "big bets" that aren’t paying off while mishandling the cash cows that are financing the party. I highly recommend you read his assessment and I agree with it, although I am somewhat more sanguine about the cash cows and would observe that Microsoft has had one sterling success in the last eight years - the server operating systems and server software which started to gain real momentum circa Windows 2000. Who knew there were high margin, low capital outlay profits in the software business?

Less cynically, Microsoft is suffering from the malaise that commonly afflicts successful companies. When they are young and hungry they conquer a market or several related ones which makes slower growth inevitable accompanied by a "middle age spread" of bloated headcounts and bureaucracy. However, management still yearns for the glory of the company’s lost youth and goes through a "midlife crisis" of mostly outlandish gyrations until a transition to maturity finally occurs, hopefully without lasting damage. Microsoft’s particular problem is that their core business is so incredibly profitable that management can indulge the midlife crisis on an unprecedented scale.