Chapter 97 Section 5 Romance of the Three Kingdoms between Wall Street and Microsoft, Yahoo and Google

In addition to making money from the listing of technology companies and speculating on the stocks of technology companies, Wall Street also makes money through mergers and acquisitions and spin-offs of companies.When two companies merge or one acquires the other, it is necessary to combine the shares of the two companies into one.Like going public, this matter cannot be done by the technology company itself, but needs to be done by the investment bank as a contractor agent.Of course, investment firms can get handsome commissions and even options on the new company after the merger.The same goes for spin-offs, where each time a company is spun off, some of its divisions either go public or merge with other companies.Investment banks also charge commissions.As a result, Wall Street expects frequent mergers and spin-offs among tech companies.Wall Street made a lot of money in the AT&T, HP, and later Lucent spin-offs, as well as in the HP-Compaq mergers.

Of course, Wall Street does not blindly encourage technology companies to merge and split in two days. They have to make decisions based on their own best interests.Since Wall Street investment banks and fund companies have a large shareholding and voting rights in technology companies that have been listed for many years, they have the ability to decide whether to proceed with an acquisition or split.Let's look back at the incident of Microsoft's acquisition of Yahoo, which was a long time ago, and take a look at the subtle role played by Wall Street in the triangular relationship between Microsoft, Yahoo and Google.

On February 1, 2008, before the opening of the US stock market, Microsoft suddenly announced the acquisition of Yahoo at a price of US$31 per share.On January 31, Yahoo's stock closed at $19.18 per share, which meant that Microsoft paid 60% more than Yahoo's market value.Microsoft's move was firstly to impress Yahoo's board of directors to accept the terms of the acquisition, but to impress Yahoo's shareholders who were eager to cash out and accept the proposal through a vote when Yahoo's board of directors rejected the offer.To be fair, Microsoft's asking price is very attractive.Some investors estimated that the deal would be done, so they raised Yahoo's stock price to $28 per share without Yahoo's reply. Some speculators even bought Yahoo's shares at a higher price of $27 per share. shares.

Jerry Yang and Filo, the founders who have been trying to protect the independence of Yahoo, certainly do not want to see the Internet company with the largest traffic in the world that they have worked so hard to be acquired.But the two of them have less than 10% of Yahoo's equity and voting rights, so their determination alone cannot repel Microsoft's hostile takeover, not to mention that some speculators have already bought more than ten percent of Yahoo! equity.The latter must sell Yahoo to be profitable.Yang Zhiyuan returned a very high offer to Microsoft, not less than 41 US dollars per share, which was later reduced to 37 US dollars.Microsoft didn't accept the counteroffer, which meant Yahoo's stock would return to around $19 a share.In this way, speculators such as Ichan who bought Yahoo shares at a high price will suffer hundreds of millions of dollars in losses, so they threatened Yahoo's board of directors to accept Microsoft's offer, otherwise they would overthrow the current board of directors through a general meeting of shareholders.Of course, the final result was that Microsoft did not increase the offer, and Ichan's plot did not succeed.In July, this farce ended, Yahoo's morale plummeted, Microsoft's MSN department was also hurt, and Google, which has been keeping quiet, is undoubtedly the biggest winner.Is this God's special favor for Google?

The inside story behind this is of course not the case.Readers may have noticed that there are two puzzling questions here. First, why Jerry Yang and Ferro, who only hold less than 10% of Yahoo’s equity, were able to repel the attacks of larger shareholders such as Ichan? Zhiyuan has a high prestige among all Yahoo shareholders, and everyone follows his leadership?Second, why Microsoft is unwilling to raise the acquisition price to $37 per share.From 31 to 37, it is equivalent to Microsoft raising the purchase price of Yahoo from 43 billion US dollars to 50 billion US dollars. Could it be that Microsoft, which had more than 20 billion US dollars in cash and a market value of 300 billion US dollars at the time, would care about this "mere" 7 billion US dollars ?You must know that Microsoft's annual cash flow is as high as 17 billion US dollars.Microsoft, on the other hand, has wasted over tens of billions of dollars on the Internet.There is only one key to unravel these two perplexing problems, and that is Wall Street.

Let's first look at the stocks of Microsoft and Yahoo as of January 31, 2008. From the above table, we can see that when the news of Microsoft's acquisition of Yahoo was released, although Yahoo's stock price rose by as much as 48%, which increased its market value by 12.7 billion, Microsoft's stock price fell by 6.6%.Since Microsoft's market value was more than ten times that of Yahoo at the time, this relatively small 6.6% decline caused Microsoft's market value to shrink by $20 billion.The combined market capitalization of Yahoo and Microsoft is still down by $7.7 billion.If this deal can be done at Microsoft's original price, then Yahoo's stock price will increase relatively, while Microsoft's will shrink a bit, and it is estimated that the total market value of the two companies will decrease by about US$10 billion.Since many investment firms and funds on Wall Street own shares in both companies, each firm and fund will calculate whether the value of their holdings will increase or decrease in this potential transaction.Except for funds that own a lot of Yahoo and very little of Microsoft, Yahoo's shareholders are unlikely to approve of the merger.With this in mind, Yahoo's board of directors was not afraid of attempts by Ichan and others to overthrow the board of directors, and insisted on rejecting Microsoft's offer.For Microsoft shareholders, the asking price of $31 per share has already shrunk their stock value, and they will never agree to the high price of $37 per share proposed by Yahoo.If Microsoft CEO Ballmer really agrees to Yahoo's counter-offer, many Microsoft shareholders will continue to sell their shares, which may not be beneficial to Microsoft's development.Therefore, Ballmer insisted not to increase the price.

Perhaps some readers still have doubts, why Microsoft's own stock price plummeted after it proposed to acquire Yahoo.Isn't this a "good move" for Microsoft to strengthen its position in the Internet field?The reason for the drop in Microsoft's stock price is that Wall Street is not optimistic about the prospects of Microsoft's acquisition of Yahoo.In fact, Wall Street has been dissatisfied with Microsoft's long-term loss of money on MSN.What Wall Street wants to see is that Microsoft can concentrate on the computer software industry and maintain high profits, rather than continue to use the money earned from software to subsidize the bottomless pit of MSN.Purely from the perspective of investment, Wall Street hopes that Microsoft and Google will divide their work, with the former focusing on the operating system and the latter in charge of the Internet advertising industry.In this way, the profit margins of the two companies will be very high, and these investors will naturally make more money.Conversely, if these two IT giants invade each other's territory, the result of their competition will definitely suppress the profits of both parties.Obviously, if this merger is realized, then the new Microsoft will compete head-to-head with Google.Considering its and Yahoo's weak position in the competition against Google, and the difficulty of Microsoft's integration of Yahoo, Microsoft must spend a lot of money to compete meaningfully after the merger, so that Microsoft's profits will decline, which is very reluctant to see on Wall Street .What's more, most of Google's circulating stocks are in the hands of large Wall Street investment companies and funds, rather than individual investors. Therefore, Wall Street must guarantee the return on their investment in Google, and they don't want Microsoft to buy blindly regardless of the consequences. (Note: After the outbreak of the financial crisis, Yahoo's new board of directors worried that the company would not be able to survive the crisis, so please leave Jerry Yang and start actively looking for the possibility of acquisitions. This is a later story.)

Behind every technology company often hides some Wall Street bankers.As we said earlier, the company's mergers and acquisitions should be carried out with the help of investment banks.And the investment bank that implements the merger plan is often the market maker of these companies.Microsoft's acquisition of Yahoo was negotiated through Morgan Stanley and Lehman Brothers as intermediaries, so they were the bankers of Microsoft and Yahoo respectively. In order to fight against Microsoft, Google proposes to form an alliance with Yahoo. Goldman Sachs and Lehman operate this matter, so Goldman Sachs is Google's banker.As a banker, it is necessary to protect the interests of the technology company that it has long touted. Therefore, in this kind of merger and acquisition case, success or failure, if it succeeds, with whom to merge with or not, sometimes it is the result of wrestling among the bankers behind it.Obviously, Microsoft's asking price of $31 per share for Yahoo was obviously discussed with Morgan Stanley, and the latter may not accept Yahoo's asking price of $37, because it will shrink too much of its own Microsoft stock.

Based on the above complex reasons, it is difficult for Microsoft to acquire Yahoo.Although speculators like Ichan threatened and lured Yahoo, they were actually relentless, because in the eyes of those investment banks, Ichan and others were just big retail investors. For acquisitions that Wall Street is optimistic about, as soon as the news comes out, the stock price of the party that pays for the acquisition will soar.The current turmoil over Citigroup and Wells Fargo's bid for Wachovia Bank speaks volumes for this.No matter which bank is successfully acquired, it will be in a good position to expand its business in the future.When news of Citigroup's victory first broke, its stock price jumped 20% in a few days.But Citigroup has not been happy for a few days. Wachovia has changed its decision to merge with Wells Fargo.This shows that Wall Street is very optimistic about the future prospects of this acquisition. After all, without a major bank, Wachovia, the competition in the banking industry will ease in the future, and mutual profits will increase.

The interdependence between technology companies and investment banks is also reflected in many other places, which will not be introduced here due to space limitations. The financial industry plays a blood role in the entire economic activity.A healthy financial environment and order can help tech companies grow.But because the financial industry is associated with huge interests, greed, speculation and even illegal deceit are shadows that the financial industry can never get rid of.A banker once said that although our society and our business are fundamentally different from a century ago, Wall Street is the same as it was a century ago, and it will remain the same in the future, because it is driven by greed. determined by nature.

Under such a premise, how a technology company can cooperate well with Wall Street and let those investment banks and fund companies become their own advocates instead of killers is an art.In fact, the first task of the chief financial officer of a listed company in the United States is not to manage the accounts for the company, but to communicate with Wall Street.He should be able to use financial language to explain his company's long-term plans to Wall Street and build Wall Street's confidence in his company. On the one hand, it can be understood that Wall Street’s pursuit of listed technology companies, whether it is suppression or suppression, has objectively helped the technology industry to survive the fittest.A truly well-managed and competitive company should be able to withstand multiple financial crises or malicious suppression by speculators.It must not only have a long-term development plan, but also give investors confidence in the short term, and at the same time be able to communicate well with Wall Street.On the other hand, a technology company cannot deliberately cater to the short-term expectations of Wall Street, so its development will be very passive.Once such a company fails to meet expectations in a quarter or two, it will be abandoned by Wall Street, which is counterproductive.