Yesterday, Microsoft announced their Q4 2012 earnings, wrapping up another fiscal year. While most of the numbers on the surface looked pretty good (beneath the surface, we’ll see), the entire quarter was dyed red by one element: the write-down of the 2007 aQuantive purchase. It was so bad — $6.2 billion — that it swung Microsoft to a loss for the first time in their 26 years as a public company.
But it was just a one-time charge that the company is unlikely to face ever again, the defenders were quick to say. That may well be true. But I’m not sure it’s true. Why? Because just a year after the aQuantive deal, Microsoft nearly got itself into a much worse quagmire: Yahoo.
In fact, in hindsight, it sure looks like Yahoo’s rejection of their deal was one of the better things that has happened to Microsoft in recent years.
In 2008, after friendlier negotiations broke down, Microsoft made an unsolicited $44.6 billion bid to takeover Yahoo. Yahoo resisted the hostile takeover and flirted with many other suitors in an attempt to “save” the company. This went on for months, with Yahoo eventually “winning” this struggle. (Only to cut a much less lucrative search and advertising deal with Microsoft down the road.)
Reports at the time indicated that Microsoft was willing to go as high as $50 billion to acquire Yahoo. For context, before their $8.5 billion Skype deal this past year, aQuantive was the largest deal Microsoft had ever done. It came in at $6.3 billion — yes, the company took a bath on all but $100 million of that deal.
Now, it’s of course possible that Yahoo would have done well under Microsoft. It’s also possible that unicorns are real. There’s essentially nothing to suggest that Microsoft/Yahoo would have worked. Meanwhile, there’s plenty to suggest that the opposite would have happened — namely, what happened with aQuantive post-acquistion. And the fortunes of Yahoo since the rejection.
Microsoft was willing to pay around $33-a-share for Yahoo. The current stock price sits at less than half of that. On paper, Yahoo’s value has been cut in half. Now, had Microsoft bought them, the stock value wouldn’t have been a metric you could measure by. But they didn’t buy them. So we can. There’s simply no way someone pays anything near $50 billion for Yahoo today. It would be hard to find someone to pay half that.
In other words, the $50 billion Microsoft would have spent in 2008 would have been worth something to the tune of $30 billion less today. Again, it’s purely hypothetical. But. Microsoft would have taken a $30 billion hit. Maybe more.
Suddenly, the aQuantive disaster must look like a double fucking rainbow.
But wait! Yahoo is a company that still brings in a good amount of revenue and even profit, someone will say. Well, so did aQuantive at the time that Microsoft bought them. It didn’t stop value from being completely and utterly destroyed, thus bringing about the write-down.
Can you imagine what would have happened if Microsoft had to take something like a $30 billion write-down? Or a $50 billion one? They wouldn’t have, of course. But only because you can’t post $25 to $45 billion in quarterly losses. You just can’t.
Microsoft’s Online Services division lost $2.5 billion in 2011. This past year, they lost over $8 billion thanks to the aQuantive write-down (but even without it, they still lost right around $2 billion). Think about what those numbers would look like with a Yahoo write-down. It would likely be enough to not only put them in the red for a quarter, but for an entire year.
A lot of people would have been fired. It may have sidetracked Microsoft from some of their more promising projects. The negative ripples within the company may have been irreversible. It would have been a disaster.
And it almost happened.