Mergers and Hackquisitions
The results of last week’s election will keep people talking for years to come. While thousands following the results from ad:tech and the millions country-wide found themselves glued to the television well into the night, come this Monday, it was already business as usual. For the Internet world, business as usual means a variety of things – more Wu-Yi Tea, Credit Reports, Loan Modification, Nebu Ad press, and of course, the future of Yahoo. Oh Yahoo, the once and probably never future king of the Internet, still one of the most trusted names and most popular destinations but an easy target for much that can go wrong with a company. For part of this year, Yahoo found itself locked in an intense battle with Microsoft, not on the playing field battle of search dominance but an off the playing field battle where it tried to fend off Microsoft’s acquisition attempts. Yahoo wanted more, and for a while they received it from Microsoft, only for senior management to feel victorious in not accepting the at the time highest offer of around $36 dollars per share. Never mind that they trade around $11 currently. In the end, the victor once again seemed like Google, who came in not to buy Yahoo but to use their immense advertiser marketplace to help Yahoo earn more money on theirs. That deal created the type of industry wide concern and discussions that didn’t happen with the proposed Microsoft deal. Certainly people within Yahoo and Microsoft couldn’t stop talking about it or, more appropriately said, having emotional feelings about the outcome. The rest of us didn’t really have anything else better to discuss.
Saying a lot has changed since the beginning of Microsoft’s interest in Yahoo earlier this year would be putting it mildly. For Simpson’s fans, Microsoft’s victory in the potential Yahoo acquisition comes through Homer’s two favorite words, "de-fault." They lost the battle to acquire Yahoo but won the war by not buying a depreciating asset in what have proven troubling times. Everyone expected to feel the impacts of the financial meltdown, but had you asked anyone, except for perhaps Nouriel Roubini, if they thought the market would go from 11,000 to bordering on 8,000 in less than three months, they would have thought it impossible. The same goes for the Google-Yahoo deal; while unpopular it seemed certain to go through. Last week, just as the election results were sinking in, the Internet’s version McCain and Palin called it quits, more unilaterally in this online version. Last Wednesday, Google called off its proposed deal with Yahoo citing regulatory pressure, one again fanning the flames of hope, at least for Yahoo shareholders, that Microsoft would once again offer to buy the company. Microsoft, though has at least publicly denied any interest and gave the business breakup speech saying they’ve moved on. We all know a) about relationships and b) how much we can trust when it was said publicly ("We have plenty of money…"), so it’s no guarantee that a deal won’t happen. The two could simply end up in a Google-like deal with Microsoft gaining Yahoo’s search traffic but not owning it. As for Google, they had initially proposed a deal with more limited scope
Thinking about the Yahoo-Somebody deal feels a lot like the election process we just underwent, where we have two people coming together, often two unlikely candidates. Our industry isn’t the only one with such interesting drama. One of America’s oldest and most dramatic recently underwent its own such exercise, resolved though in a matter of weeks as opposed to eight or nine months with Yahoo. Earlier in October GM announced it was exploring a merger with now-privately held Chrysler. Like Yahoo, GM once ruled its domain, owning the largest market share of any car company. You would have to have been asleep at the wheel to not have some knowledge of the continuous slip in market share the company, and their two other counterparts in Detroit, Ford and Chrysler, have undergone. It’s not pretty. Of the three, Chrysler has already taken part in a merger, formerly with Mercedes Benz parent Daimler, only to have wound up single again. GM, now at 22 percent market share, has more cash than the company does market share, $20 billion, but they blow through more than $1 billion monthly, and even they have admitted they could very well run out of cash without some government intervention. The initial discussions had suggested that GM and Chrysler could merge, keep only select brands, and save massive amounts of money by cutting tens of thousands of jobs. Michigan, which has a heavy exposure to the auto industry has already shed hundreds of thousands of jobs this decade and has an unemployment rate almost fifty-percent above the national average.
Even though the deal between GM and Chrysler owner Cerebus didn’t happen, one initially touted as vital to the survival of the US auto industry, it’s an incredibly fascinating issue. For those my parents age, growing up meant driving an American car, and even when foreign options existed, it seemed distinctly un-American to drive anything else, much the way it was to buy things not made in America. If you are under 40, especially under 30, you probably have lived with none of this and might think, why not let these companies fail? We grew up expecting to change jobs often, expecting little from our employers in regards to retirement and health care. That wasn’t the case for those at GM and other US auto industries. They pretty much created the middle-class and shaped an entire generation and then some of values towards their employer, rivaled only by IBM in the same era. Those promises though are one of the chief reasons that the Detroit auto industry struggles mightily, and they contrast greatly with the new-auto industry, one building cars in America for foreign brands that don’t have the unions, pensions, and health care costs drowning the old-auto industry.
Why the big deal over Old Detroit? The scale. Struggling as they are, the Detroit Three still account for somewhere around 200,000 jobs and nearly 3 million related jobs, combining for approximately 4% of US GDP. If they go under, it’s a hiccup that the entire system might not be able to afford. It would hit blue and white collar both with the nonprofit trade group Center for Automotive Research estimated a loss of well over a million jobs if just one goes under.
It makes you wonder about someone like Google. Ours is such a liquid market that it would create a huge disruption but a solvable one, at least options exist. Perhaps the Detroit Three’s situation doesn’t differ that much from Microsoft’s, at least conceptually. They both lost the industry they needed to continue to dominate for future relevance, but each had a handicap. They lacked the clean slate to gain market share the way their competitors did. It’s a great lesson for constructing deals that might bind us towards rushing to put together mergers that might not solve the fundamental problem. How Low Can It Go ?
