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Category: ibanks

MS-Yahoo: Can Ray Ozzie Make Elephants Dance?

My two cents on Microsoft’s hostile bid for Yahoo: Microsoft, finding itself in the new world of the social graph, needs to buy some friends. People don’t like Microsoft, they fear and respect it. People don’t buy Microsoft products, they buy products that already contain the OS and Office. People choose Yahoo, they choose delicious and flickr. They like Yahoo Finance. And it’s all supported by advertising.

The question about whether Microsoft could successfully integrate Yahoo is a people question. Is there a strong enough personality within Microsoft to envision an entity that creates a new integrated whole. Clearly it’s not Steve Ballmer, and that means it’s got to be Ray Ozzie. Ozzie is trying to move the key Microsoft revenue streams on to the network with his “Live” initiatives. Yahoo is the advertising framework and user base that could contain and support the new web-based Microsoft Office live.

If Ray Ozzie can make elephants dance, many of are wondering who will call the tune. Microsoft is willing to pay $31 a share, but the cost to Microsoft will be much higher if they decide that Yahoo has to be rebuilt on a Microsoft technical stack. That was their approach with HotMail and it was very expensive. Is this the moment in time where Microsoft embraces a mixed technical operating environment? Yahoo is a big supporter of open standards and open source, the community is justifiably concerned about how Microsoft will affect this. When you integrate YahooMail and HotMail, do you make your decision based on technical stack or the quality of the product? Are the decision makers at Microsoft capable of making a decision based on product quality?

Can a shot-gun wedding result in a happy marriage? When we discuss $1 billion in efficiency as a result of the merger, we’re referring to the brutal process of merging groups, firing people, closing facilities and trying to keep the lights on during the process. The digerati of the Bay area and Redmond will be significantly affected by these changes, and it will ripple into the surrounding economies. There will be a lot of pain for both those who stay and those who leave.

It’s up to Ray Ozzie to provide a new vision of the combined entity that will convince those left standing that it was worth it. For the deal to ultimately be successful, Microsoft will have to be transformed as much or more than Yahoo.

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Bill Hambrecht, Google & pricing an IPO with a social network

The Google offering happened a while after I left WR Hambrecht + Co, but I can’t believe I never saw this Charlie Rose interview with Bill Hambrecht. It seems like ancient history viewing it now. Looking at the offering price and today’s price one might think the deal was underpriced by the modified dutch auction. As I recall, at the time, many thought the IPO offering price of $85 per share was too high.

Hambrecht’s modified Dutch auction method of pricing IPOs still isn’t understood very well. Basically it’s the idea of the wisdom of crowds (or markets) applied to determining the appropriate offering price for a company’s initial public offering. Think of it like Digg for pricing the initial stock price for a company. It’s a like asking the community of investors what the right price should be— a radical use for a social network.

The method works best when a broad range of people have an opinion on the proper initial price for a company’s stock (a high bid to cover ratio). It doesn’t work very well when the company isn’t well known. In cases like this investors (bidders in the auction) actually have to read the prospectus and attempt to determine a reasonable price. This, of course, is nearly impossible. It would be like trying to rate a new album from a band you’d never heard based on the tax returns of the musicians.

For those in the tech community looking for liquidity events through an IPO (as opposed to acquisition), you’d do well to at least take the time to understand how the Dutch auction works. Back in the day Joe Tennis and I put together a flash animation explaning how Hambrecht’s OpenIPO works. Check it out, it still holds up pretty well.

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Decoding Wall St.’s Analysts: Full of Bull

Full of Bull

Attended a book launch party last night for Stephen T. McClellan‘s Full of Bull. The subtitle of the book is: “Do what Wall Street does, not what it says, to make money in the market.” The crowd was an interesting and lively mix of financial industry folks, artists and people connected to the world of opera. (Stephen’s wife is a painter and worked at SF Opera for many years)

I haven’t read the book yet, but what I gather from Stephen’s remarks, and skimming through, is that he hopes to help people decode the language of Wall Street. As in Lewis Carroll’s Alice in Wonderland, it’s important not to take things at face value. A “buy rating” doesn’t mean buy, and a “hold rating” doesn’t mean hold. A lot of the communication on the Street is through signaling, in the margins, or outside of the official channels. Information asymmetry is the primary method by which money is made. Clarity in communications levels the playing field and destroys perceived advantages. Muddy waters are the natural habitat of the players in financial markets.

As the market enters a period of uncertainty after an extended bull run, it’s good to have books like this to turn to. An investor looking for advice would do well to learn how to converse in the language of the Street before acting on the latest hot analyst recommendation spewing out of a cable news station.

I’ll be reading Full of Bull in the next few weeks, and you should too. Let me know what you think of it.

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A Shorter Distance to Fall

Venture capitalists are wondering what it means when the cost of creating a Web start up goes so low that they lose relevance. More start ups created faster mean more exploration, more ideas and failing faster. And failure no longer means crashing down from a great height, it’s a shorter distance to fall. Paul Graham invoked the questioning with his musing on The Future of the Web Startup. Value and power has moved from money to creativity.

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