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September 25, 2006

FaceBook Battle - Speculation of Turf War at Yahoo! Inc

posted by MR WAVETHEORY at 9/25/2006 02:09:00 AM


Whenever news of a "potential" acquisition is leaked to the press, expect there to be political forces at work that are for or a against the deal. Yahoo! Inc's rumored acquisition of FaceBook, first broken by the Wall Street Journal, seems to be a such a case. Within one earnings disappointment under its point and another one soon to come, I suspect there are 2 opposing factions within the executive leadership of Yahoo! that are sparring over the precise strategy of how to get Yahoo! out of its current rut.

I'll call the first faction the Web 2.0 Possee. These are the leaders within Yahoo! who are very eager to acquire cool companies - companies that are engaged in social networking, video sharing, viral marketing concepts. The Web 2.0 Possee was responsible for deals like Delicious, FlickR, UpComing. They wanted to make Yahoo! cool again. Their slew of acquisitions have given Yahoo! lots of buzz. But this Possee doesn't care about the numbers. They don't care about the Moolah. With several of these cool (small) deals under their belt, the Web 2.0 Possee wanted to score the big one - FaceBook - ultra-cool, somewhat financially sound, but definitely not a bread and butter type acquisition especially when the return on equity is 3.5%. I believe the Web 2.0 Possee wanted to get FaceBook done really bad. But they got put in the penalty box when Yahoo! disappointed investors last quarter. They lost out to Faction B.

Let's call the opposing faction the Green Shades. The Green Shades are the number crunchers within Yahoo! who wear the green shades. They have largely been responsible for financially sound, and profit-driven acquisitions like Overture and Kelkoo which brought in cold hard cash - revenues and profits. All proteins. No carbs, and definitely no fat! When Yahoo! missed the numbers last quarter, the Green Shades put their foot down and issued an ultimatum to the Web 2.0 Possee, "No more carbs. No more Web 2.0."

With their piece de resistance within their reach, you can bet the Web 2.0 Possee was miffed when Yahoo! blew the quarter. After all, Yahoo! had to be made cool again, and therefore, negotiations proceeded with FaceBook, a price was reached, and ... a bomb was dropped. I suspect the Green Shades leaked rumors of FaceBook deal to the Journal to scuttle the deal - and turn an internal turf war into a media circus and beauty contest. With the Web 2.0 Possee having stuffed their mouths full with pounds and pounds of carbs and non accretive acquisitions, guess who would win in this beauty contest?

So, here we are sitting here today, mere spectators of an internal turf war within Yahoo! - watching the battle between two factions unfold - Web 2.0 versus Green - two factions trying to defend their beliefs and ideals on how to turn around the fallen king of the Internet. Things are not well when you have to force everyone to take the holidays off.

To be honest, whether to acquire or not to acquire FaceBook is a very tough call. FaceBook brings no clear financial benefits immediately and it might undermine investor confidence in the current Yahoo! management team. After all, acquiring FaceBook would signal to the world that Yahoo! is going in the direction of a media conglomerate ala News Corporation rather than a search technology company ala Google. Doing so would immediately hurt the stock as investors lose confidence in Yahoo!'s ability to fight both Microsoft and Google in the search war. It could be seen as a capitulation of the search market.

On the other hand, if the fundamentals of Yahoo deteriorate further as it loses share to MSN and Google, then an acquisition of FaceBook would be very prescient. Yahoo would be able to regrounp and rebuild. Social networking would be a new direction for Yahoo to grow and a fertile field for growth that is unencumbered by entrenched competitors.

If you were Terry Semel, what would you do?

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