New Rules: Rich Bullies Feast On Bad News

One thing became clear this week: Intelligent bullies with position and financial resources can opportunistically seize on bad news paralysis. Their objective--to leverage waning assets or those difficult to value in a chaotic environment--is a template for forced growth. It will become a hallmark of this year's restructuring deals.

This trend is evident in Microsoft's hostile takeover of Yahoo, Liberty Media's takedown of InterActiveCorp. and JP Morgan Chase's dirt-cheap rescue of Bear Stearns. It even is evident in Google's sweeping transformation of an advertising industry chasing its own tail. In every case, the companies being pursued simply don't have much choice but to capitulate. They are strapped with economically weak, tech-challenged, ineffective fundamentals--regardless of projected future bright spots. Their Achilles heel: They cannot redefine and reconfigure their businesses fast enough.

Yahoo's March 18 unscheduled filing with the Securities and Exchange Commission offered financial forecasts to support its rejection of Microsoft's "undervalued" $45 billion takeover offer. While standing by its lackluster 2008 guidance, Yahoo exceeded analyst estimates by projecting that its advertising revenues will grow one-third by decade's end, from $5.7 billion this year to $8.8 billion in 2010. At issue is the fragility of Yahoo's projections and what the company must do (with or without Microsoft) to realize such aggressive gains in a hotly competitive, radically changing advertising market and weak economy. If Yahoo has the inherent strength it boasts, why hasn't it realized the $40 a share it projects as a stand-alone rather than trading short of Microsoft's bid of $31 a share?



With deep pockets and drive for online ad share, Microsoft is taking advantage of Yahoo's current vulnerability. The lack of immediate action on all fronts has prompted a precipitous drop in both companies' share prices and nervous third parties. Chinese conglomerate Alibaba is seeking a buyer for Yahoo's 39% stake to keep it out of Microsoft's hands in anticipation of exercising its change of ownership options.

While Yahoo's disclosure was clearly designed to boost the deal price rather than deter its inevitable sale to Microsoft, participants and the industry would benefit from a thoughtful analysis of what Microsoft can bring to Yahoo's growth agenda.

Liberty Media's public takedown of IAC represents a similar fracture of a company's perceived and real value, cracked open by aggressors who have the money and market clout to force change. Liberty's crusade to halt the breakup of IAC and force out its chairman and CEO Barry Diller resulted in a public courtroom trouncing by long-time Diller nemesis and Liberty chairman John Malone. Primary shareholder Liberty will walk away with something and IAC will be radically changed--with the extreme being Liberty's control of IAC and Diller's archetypal ouster.

Despite Liberty's improving record as an operator--which still falls short of its stellar long-standing endeavors as an iron-fisted investor--IAC's assets are positioned to improve whether they are integrated into Liberty's expansive global portfolio.

Too bad, then, that analysts already have layered in a 15% discount on IAC as a result of the time, money and distraction of the legal fight. IAC's monetization challenges will not change, even if Malone is successful in his cashless, taxless coup.

JP Morgan Chase's weekend steal of Bear Stearns for $2 a share, or the same price as Bear's $236 million headquarters in midtown Manhattan, will become the quintessential opportunistic consolidation play for all industries. While it is certain to face a shareholder challenge and even higher counter-bids, JP Morgan Chase has the market position and financial resources to acquire Bear in a swift and efficient way that few others can. The federal government paved the way with guarantees, such as backing $33 billion in Bear's more questionable obligations and Bear Stearns' headquarters as collateral if the deal fails.

Many other companies in all industries, including media, will find themselves in rapidly weakened states due to economic downturn, misplaced bets and mismanaged strategies. And there will be well-heeled fire-sale artists like JP Morgan Chase waiting to grab them at virtually no cost.

Google's intensifying reign over all advertising-related companies represents an unprecedented broader conceptual takeover of similar transformational proportions. Its search technology and financial heft make it possible for Google to determine the changing values of companies and their business models. Increasingly, ad-related company fortunes will rise and fall on their ability to keep pace with Google metrics and mindset. Central to all is how quickly advertising dollars will shift from traditional to the Internet and digital interactive mobile platforms where Google rules.

By shifting its search and online advertising sites to display, mobile and local ads, Google is challenging the creation and destruction of all digital value. Google's revenue growth of $2 billion in 2007 was twice that of offline media ad revenue growth, and it captured twice as much revenues as its three online rivals: Yahoo, AOL and Microsoft. Google estimated that display advertising could be as much as a $4 billion business in the near-term. Although online ad spending will be $26 billion this year, Google's sites are set on the full breadth of $300 million in annual measured media ad spending. It is not just after one company; it's after them all.

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