It’s a New World (Szelhamos Rules Archive February 1, 2008)


The original Szelhamos Rules ran for precisely 1 year, from February 2007 – February 2008. This article originally appeared February 1, 2008 on the occasion of an earnings related Google share price plunge and the announcement of Microsoft’s bid for Yahoo!.

As a Google shareholder, I haven’t been very happy lately. In fact, I was upset about some of what I considered to be Google’s disregard for its shareholders even when it was approaching $750. Imagine the rants that are going through my mind now that Google is pointing another $40 points lower in the pre-open following yesterday’s earnings release.

Why exactly were we spending money on space shots?

Focus guys. Focus.

I understand why Richard Branson does it, but Google? Is there something to search for on the moon? Maybe they can use the lunar surface to house their servers in an ecologically friendly fashion.

So the word comes out today that Yahoo received a so-called “unsolicited” bid from Microsoft for $31, a hefty premium to yesterday’s close. It will probably take all of 10 minutes for Yahoo’s board to meet and accept this “unsolicited” offer. But just a few short months ago, Yahoo was at $31, without any takeover rumors propping it up.

And with Microsoft offering Yahoo shareholders a choice of cash or stock, I decided to pick up some shares of Yahoo at $28.50 and immediately sold some February $30 call options on those shares.

I’ll never be mistaken for an arbitrageur, but this seemed like free money.

Considering that Microsoft usually gets a free pass when it comes to anti-trust issues, and Microsoft said that the deal is not contingent on financing, this is a done deal.

As far as the European Union goes, who really cares? Microsoft never really even cared about the operating system and browser bundling debacle a few years ago. They’re smart guys with really deep pockets, who could easily figure out runarounds, while paying any imposed fines.

Those are just the cost of doing business. In the old days, it just would have been in the form of kickbacks and bribes.

Jerry Yang is now off the hook. He won’t be among the legions of ill-fated returning hero CEO’s who weren’t able to resurrect their moribund companies.

The question becomes how will two substandard search engines going to do against Google and will Google reflexively buy the 90% of AOL that it doesn’t already own and doesn’t need.

Google shouldn’t and won’t. But the very thought has breathed a little life into the lifeless shares of Time-Warner.

With all the talk about synergy, the ultimate synergy would be Yahoo paying Google to send Terry Semel into orbit. Maybe the architect of Yahoo’s fall into weighless orbit can help establish Google’s first extra-terrestrial colony.

Years from now, when the history of internet search is discussed, it will be Google that everyone will remember, with a few oldtimers recalling something else being around. What was that other one? Ya Who?

Microsoft’s offer for Yahoo is valued at about $45 billion. Based on what Google paid for its 10% share of AOL a couple of years ago, the remaining piece would be worth about $45 billion, as well.

Last week, I thought that Google might go down after Micosoft announced its earnings and I was prepared to pick up some more shares.

It didn’t happen that way, but at these levels, I’m ready to pick up some more Google shares once I give the market 30 minutes or so to get over some of the initial emotional trades.

In the meantime, the pre-open market rally that was being fueled by Microsoft was then killed by the official jobs numbers. Even though the unemployment rate went down to 4.9% from 5%, the revisions were killers and 100 points just evaporated in a couple of blinks.

A decline in payrolls was not exactly welcome news, but the tends to validate the Fed’s decision to drop rates and may also be validating S&P’s call that the recession started 3 months ago.

In the meantime, a few months ago I had written about Rio Tinto, which is one of my longest holdings. I’ve had shares for more than 10 years. Back then, I wrote that the Chinese weren’t very happy about the prospects of a Rio Tinto takeover and a potential stranglehold on the materials that China needs to keep its engine going and growing.

And today China acted.

They’re picking up a piece of Rio Tinto, together with Alcoa, which had also been rumored as a potential suitor of Rio Tinto. Since I also own shares in Freeport-McMoran, BHP Billiton and Lundin Mining, the trickle down effect is welcome new, especially since this sector has really been beaten up over the last month. How nice that at 10 AM Rio Tinto is up $41, while Google is now down $41.

Yin and Yang.

No pun intended.

The only problem is that I have twice as much Yang as Yin.

Isn’t that always the case?

In the new world, the one that will be a post Google-Yahoo union, Microsoft will surge to an Avis like position in the world of search. They will be a strong, but still distant #2.

$45 billion is a lot to pay to be a runner-up. But sometimes, being the runner-up can put you within a heartbeat of being #1.

No doubt tha’s what America’s mayor has on his mind. Being #2 to the oldest President in history may have its advantages. There’s nothing wrong with the back door, if that’s what you’re interested in, although I don’t think that Giuliani or McCain will consider legalizing it.

With all of this talk about the Bush proposal for an economic stimulus package, my guess is that McCain and Giuliani are all for stimulating your package in the privacy of your own home, but aren’t totally ready to embrace an entirely new world.

The wonders of internet search back this line of thinking.

A Google search for “stimulus package” doesn’t seem to use an algorithm that identifies many economics related sites. Whereas there is still some debate over the nature of the economic stimulus package that should be created, the online community seems to be in near universal agreement that the stimulus package requires batteries.

Maybe Microsoft and Yahoo will be able to get it right.

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