The Microsoft-Yahoo venture and sentimentality in business

One of the biggest mistakes a strategic decision maker in a company can make is to put feeling or get emotional in the decisions he makes. This is so obvious in all the recent history of Yahoo’s struggles! Microsoft and Yahoo have announced that they will work together under a protocol signed for 10 years in which YHOO is bringing the sales team and MSFT is bringing the technology, a hot topic that demands to be commented from various points of view.

The deal itself:

YHOO gives up that thing they were most proud of until now: “the search” technology. Basically they started out as a search engine (remember those days when they were the only search engine out there? Command line “lynx http://www.yahoo.com”?) and now they are giving that business up, they are outsourcing it. They are no longer developing the technology that is at the heart of their business, and from now on they depend on a third party. This is extremely dangerous on the long run, but, as a good friend of mine says, “it’s no use if my dad can find me a wife tomorrow if there is nothing to **** today” (excuse my saying so). In other words – dangerous deal on the long run for YHOO, but today it might save them from certain death. Because, by accepting this deal (many analysts see it as MSFT’s rape of YHOO, others as an act of prostitution from Y!), they show us how close they were to the bottom of the pit (or still are???).

They cut expenses massively and hope that with Microsoft’s help, their sales will increase with more than the 12% they are giving up now, so maybe they are out of the woods. Microsoft was left with the technology (the most important thing for them since I have known them) and they got 12% of Y!’s sales. The rape thing can be seen from the stock market’s reactions: YHOO’s shares dropped by 10%, MSFT’s shares went up by just a little (very little, but they went up). I believe now as I did before (when Y! refused the deal last year), that MS will swallow them in one gulp.

Cause:

All of this (the terrible position in which Yahoo is now) is due to the feeling the young Jerry Yang put in his “child”, in the company he created and developed. This man had the opportunity of his lifetime: he had an offer to sell the company 6 months before the crisis (very important moment) at a price that was significantly higher than the stock market price. He refused for sentimental reasons, from the series “I am not selling my company”. He refused the second offer, he refused the partnership. He could have been a hero for many and instead he ended up being cursed by everyone. When MS turned its back on him, he realized what he had done and he tried something with Google, but nothing came out. Plan B never works when you’re desperate. The shareholders kicked him out of his company (notice the irony) for what he did. I would like to add here a line from Warren Buffett: “I made so much money by selling every company I had before it was time to sell it”.

Returning to Yahoo: They brought Carol Bartz in Jerry’s place, probably the best person to save the situation. I have been following her since 1992 when she reached the position of executive chairman at Autodesk and I had a small company in Romania that was programming for AutoCAD. Later on (she stayed on the job for 14 years and grew ADSK from $250 million to $2 billion) I met her and she is truly an iron lady who knows perfectly how business is done. Carol brought back Yahoo to efficiency oriented thinking. She managed to overcome customs that no one was trying to understand or evaluate and she signed this deal that would have seemed heresy last year. I am not saying it is the best thing she could have done, I don’t know the internal situation. I am only saying that Jerry made major mistakes that a cool head, without emotions, would have avoided.

In this sense, this BBC article is interesting: “Only an outsider like Ms Bartz could do such a deal” said Tim Weber, business editor of the BBC News website. “She has no sentimental attachment to what was once the core of Yahoo, its search business”.

Conclusion: Let’s see what comes out of this and how Madame Carol manages to fall on her feet again… And for us, let’s remember that we must manage a business with a cool head. Otherwise we risk, by trying to defend it, to actually suffocate it with our own hands, just as Jerry massively missed the chance to fully capitalize the opportunity, now Carol having to take emergency measures.

For reference – Yahoo’s recent history in a few links.

Later edit:
The math behind this deal is: a+b>=c+d, where

a = cutting costs as a result of letting the whole search engine development team go;
b = sale increase as a result of adding Microsoft websites in the website portfolio;
c = the 12% of sales that are given to MS;
d = the $500M that Carol says they’ll gain from this deal.

(English version by Teodora Popescu)