Why Pay So Much for Yahoo?

I had a nice little back and forth with two friends this morning over the Yahoo deal. "The Walm," a hedge fund guy who covers Tech in London, and Heg, a guy pretty familiar to this blog are two of the smartest guys I know, or maybe it's just the English and Irish accents.

Anywhoo, there was a lot of debate as to why MSFT paid so much. Here is my take, pre-reading any articles on it (I woke up a little late after celebrating my buddy Tucker closing some big deals).

Regarding the 60%+ Premium:

• I think it has to be high cause Google will come in and bid. Basically, they're trying to make it high enough so they don't get into a bake-off and Yahoo just excepts immediately. If you look at every deal these two have competed on, it's gotten ridiculous valuation wise. [Adding to the discussion: I know there would be anti-trust issues if Google bid, but at the very least it really slows down the merger. Believe me, Google would make noise.]
  

One Argument: Premiums to Historical Yahoo Stock Prices makes the premium look ok:

• I think looking at Yahoo's old stock price is a false argument. A lot of hope was priced into it. Now mediocre returns are priced in.

Market Share, Market Share, Market Share:

• This is really about having enough search market share to matter to advertisers and less about monetization (someone said that because Yahoo monetized search better, it would improve MSFT monetization, which is true but a smaller point, in my opinion). Google is pretty damn close to achieving a monster network effect where people say, "I'm reaching 80% of search/ad traffic with Google, I'll cut my complexity and just work with them." There are services like Clickable that are trying to be a bridge between the two systems, but I'm not sure it will work. MSFT needs Yahoo to remain viable from a market share perspective. The better monetization will help make the deal payoff better but first order of business is remaining viable.

Big Picture:

• It's really interesting to watch the consolidation phase start. Audible is getting bought on the same day by Amazon. I think we're officially in consolidation mode now. Amazon, Google and MSFT are going to come out of this as super powerhouses.
  

• The day before this deal, Google missed Wall Street projections. You have to worry about the other advertising "networks" that have been popping up over the last few years. When the slowing economy is impacting Google, it could really hurt the smaller guys.

Thanks for humoring me on my thoughts. More professional thoughts can be found at Paul Kedrosky's Infectious Greed Blog.