Citi’s Internet Analyst Mark Mahaney has been at the center of the Microsoft/Yahoo takeover battle since the beginning. On February 2, a day after the Microsoft bid, Mahaney gave his reasons why he believed the deal had just a 60% chance of happening.
Mahaney also estimated (on February 2) that a search advertising outsourcing arrangement with Google could boost Yahoo cash flows by 25% and suggested that the financial markets were underestimating the probability of such a deal (he was right, as we learned two months later).
Later Mahaney updated his estimate based on new data and said a Google deal could increase cash flows “more than $1 billion a year,” a 50% gain in cash flow from 2007.
Last Friday, in anticipation of the expiration of the Microsoft deadline for Yahoo action on the bid, Mahaney made a new set of predictions: 45% chance of a merger at a price somewhat higher than the initial bid, a 40% chance that Microsoft will go hostile, a 10% chance that Microsoft walks away, and a 5% chance for deal at the original bid to be accepted. That means he thinks a deal in some form is 90% likely, up from his 60% chance on February 2.
Given how consistently right Mahaney has been in his analysis, Erick and I reached out to him today to pick his brain on the deal. The podcast is below, and a transcript has been posted on TechCrunch.
Key takeaways:
- Mahaney clearly thinks a Yahoo/Microsoft deal is going to happen, either through a hostile move by Microsoft (40%) or via a negotiated deal (50%).
- He doesn’t count out the chance for a more permanent Yahoo/Google deal, though. We talk about the various ways Yahoo may be able to get a Google deal past the regulators, particularly via outsourcing only a portion of search ads on a non-exclusive basis.
- Mahaney maintains his current estimate that Yahoo can increase cash flow in the near term by $1 billion/year by outsourcing search to Google.
The most interesting exchange came at the end, when I steered away from what Mahaney thought would happen, and asked him what he would do if he were Microsoft CEO SteveBallmer: walk from the deal, or go for it aggressively. Mahaney didn’t hesitate in his answer:
Arrington: So if you’re Steve Ballmer, do you walk from this deal or go after it aggressively?
Mahaney: You go after it aggressively. You know what it’s like to see businesses increasingly concentrate on one provider. The longer you wait to attack that provider, the worse your odds. You can’t walk away.
There are very few people outside of Microsoft who know the company’s business as well as Mahaney. If he says Microsoft needs Yahoo, I’m not going to disagree.
