I was not sure we should even write another post on this potential deal, but I was giving a speech today in Florida and someone texted a question wanting my opinion onto the screen, so I take it people are still intrigued. I have had some time to read the various opinions out there and digest the possibilities, so here is what I think will happen, and what concerns me for Microsoft.

This is a hostile takeover, and in the last few days, two pension funds have sued Yahoo for not taking the deal. The basis for both suits is that Yahoo is implementing poison pill techniques, like implementing rules giving every employee egregious severance pay packages, and looking for third party options that would block the acquisition. The problem, as alleged, is that the offer from Microsoft is fair and the company is stubbornly not taking it. This is about the ego of the founders and the board, and not about providing shareholder value. I actually agree with the pension funds and think that Yahoo would be lucky to do this deal. They have not shown that they can compete technology wise with the other players in the market at this point and have been slipping as a brand. For their shareholders sakes, they should sell.

On the Microsoft side, I am pretty confident they will win. This is a hostile takeover and they do not need Yahoo’s Boards approval to buy peoples shares. They can simply buy them and reconstitute the Board. It does make it harder that Yahoo is looking to defend themselves by making the company less attractive – kind of a porcupine strategy. They problem with this is it also makes them less attractive to their investors. In the end, Microsoft should win. But if they don’t, it might be disastrous for Yahoo over time. The big question in my mind is why would Microsoft want Yahoo anyway.

I guess the obvious reason is they want to compete with Google in the search space. They also would like to integrate the few things that Yahoo does well – like email. The problem for me is I just don’t see how Yahoo is worth the billions that have been offered. If you leave them alone, it will take forever for them to pay off the price. If you integrate them, it will be a brutal mix in over 3 years that will cause the brightest people to leave on the Yahoo side, and will anger many Yahoo customers. Instead of just being a doomsayer, let me be an advice giver. For $30billion plus, Microsoft could do much better. They could use their cash to make a number of smaller acquisitions of companies that have a spread of leading technology and big upside potential. Only one out of five of the acquisitions would actually have to pay off in order to them to get a return. Think of the intellectual property they could buy with just $5 billion spread across 20 good young companies. Better yet, they could spend $2billion more on R&D and develop their own world class technology in the search space and try to out code Google. I guess that sounds easy but if they could have done it, they would have already. So their theory is, if you can’t be cool, then buy cool. The problem is Yahoo is not that cool – and it is expensive for what they are getting… Scott