Parsing Yahoo's Shareholder Letter: Baby, You Know I'd Never Hurt You On Purpose

The latest Yahoo statement -- a proxy battle letter to shareholders -- shows us just how poorly bad spin ages. At the beginning of MicroHooGleCahn saga, the Yahoo graveyard-whistling looked slightly brazen. Five months later, it now just seems deliriously self-delusional.

Thus, an especially aggressive parsing is required to tether it back to reality.

Bostock & Yang: Dear Fellow Stockholders:

Translation: Dear Hostages:

Bostock & Yang: We are writing to update you on the latest developments here at Yahoo!, including our recently announced commercial agreement with Google and the outcome of our discussions with Microsoft regarding a potential transaction.

Translation: We are writing to beg you to vote against Carl.

Bostock & Yang: On June 12, we announced a non-exclusive agreement with Google that we expect will generate approximately $250 to $450 million in incremental operating cash flow for Yahoo! in the first twelve months following implementation.

Translation: We also expect the DOJ not to notice the deal. We have great expectations.

Bostock & Yang: This cash flow will enhance our profitability as well as help support achievement of our key strategic objectives.

Translation: We like to think of ourselves as a freshly capitalized re-start-up.

Bostock & Yang: Combined with continuing advances in our own search capability, the agreement is an important step in our efforts to capitalize on the high-growth online advertising opportunities where we are best positioned to compete successfully and create more value.

Translation: That's right, even more value. Can you stand it?

Bostock & Yang: Let us explain why we find this new agreement so exciting.

Translation: Yes, we know we have some 'splaning to do.

Bostock & Yang: The Yahoo!-Google Agreement is Financially Attractive and Strikes the Right Strategic Balance.

Translation: The Yahoo!-Google Agreement is the Best Available Option Remaining.

Bostock & Yang: Under the agreement with Google, Yahoo! will continue to provide algorithmic and sponsored search results, but now will also have the ability to run sponsored search ads supplied by Google alongside Yahoo!'s search results.

Translation: It's an "ability."

Bostock & Yang: Advertisers will pay Google directly for each click on Google paid search results appearing on Yahoo!. Google will then pay us a fee (in industry jargon, traffic acquisition cost) based on revenue realized from click-throughs on ads supplied to Yahoo! by Google.

Translation: We won't trouble you with all of that industry jargon that explains that we are basically abandoning hope that we can continue as a technology company.

Bostock & Yang: This carefully structured agreement strikes the right strategic balance, enhancing our financial results while advancing our strategic objectives of being the "starting point" for the most users on the Internet and offering such compelling value that advertisers will see us as the "must buy" in online advertising.

Translation: We still don't understand why the Google guys giggle ever time we say "starting point" or "must buy."

Bostock & Yang: One of our key strategies for achieving these objectives is to capitalize on the increasing convergence of search and display advertising, where we are especially well positioned to compete and succeed.

Translation: We like to think of Google's growing dominance as "convergence," and we're structuring ourselves underneath that dominance because it is the only way we can survive... er, compete and succeed.

Bostock & Yang: We have already accelerated our efforts to strengthen our presence in display through a variety of initiatives and acquisitions in recent months.

Translation: Our efforts have accelerated, as have our share declines.

Bostock & Yang: Our new commercial agreement with Google enhances our ability to pursue this strategy.

Translation: Our new commercial agreement with Google enhances our ability to mask those share declines.

Bostock & Yang: Another key strategy is to open our platform to other developers to optimize monetization for our advertisers and publishers and provide the best experience for our users. We see this agreement as a natural extension of the efforts we have already made toward an open marketplace.

Translation: We are dealing from a position of increasing weakness, and thus we're open to cutting bad deals with just about anybody... other than Microsoft.

Bostock & Yang: The Google agreement is non-exclusive and provides strategic and operational flexibility for Yahoo!.

Translation: Maintaining flexibility seems to have served us really well thus far.

Bostock & Yang: It allows Yahoo! to use Google's services in those areas where Google monetizes our inventory more effectively but also permits us to continue to use our own search technology in areas where we believe we are most competitive.

Translation: We're selling share to Google. That shouldn't have any long-term implications, right?

Bostock & Yang: The net result is that the agreement helps us accelerate one of our strategic aims--closing the monetization gap.

Translation: By using the furniture for firewood, we can keep the house warm forever.

Bostock & Yang: At the same time, it allows Yahoo! to continue to compete aggressively in search and display advertising.

Translation: We're aggressive competitors. Grrrr!

Bostock & Yang: Importantly, the agreement does not prevent Yahoo! from pursuing other alternatives that could increase stockholder value.

Translation: Importantly, we know that the market's lingering hope that we'll ultimately sell to Microsoft is the only thing that is keeping our stock from crashing into the teens.

Bostock & Yang: Because the agreement can be terminated by either party upon a change in control, it would not preclude a transaction with Microsoft or any other potential acquiror in the future.

Translation: So hang on to those shares!

Bostock & Yang: The Yahoo!-Google Agreement Does More for Stockholder Value than Microsoft's Search-Only Hybrid Proposal.

Translation: We Remain Absolutely Obsessed with Stockholder Value.

Bostock & Yang: We also want to update you on the conclusion to our discussions with Microsoft regarding a potential transaction.

Translation: We've got an alibi.

Bostock & Yang: As we explained in our last letter, our board and management held numerous meetings and conversations with Microsoft about its proposal to acquire Yahoo!, both before and after Microsoft withdrew that proposal on May 3. On June 8, our Chairman, Roy Bostock, other independent board members, and members of Yahoo!'s management team again met in person with Microsoft representatives.

Translation: We tried really, really, really hard.

Bostock & Yang: At that meeting, Microsoft stated unequivocally that it has no interest in acquiring all of Yahoo!, even at the price range Microsoft had previously suggested.

Translation: Once they found out about the dead-hand mechanism we had put in place, they somehow felt a new price range was appropriate.

Bostock & Yang: Microsoft did propose an alternative transaction. Rather than acquire our whole company as it had been proposing for months, Microsoft now proposed to acquire only our search business for $1 billion and a share of future search advertising revenue.

Translation: They came to understand that we were pathologically committed to preventing them from buying the company outright.

Bostock & Yang: This proposal also included an $8 billion investment in Yahoo! but required Yahoo! to commit to a 10-year exclusive arrangement that would have made us dependent on Microsoft for all of our search business.

Translation: We prefer our growing dependence on others to be diversified.

Bostock & Yang: It would also have given Microsoft veto rights on certain future Yahoo! actions, including a sale of Yahoo!.

Translation: Geez, it's amazing what people expect when they take an $8 billion stake.

Bostock & Yang: Our board of directors and management made a great effort -- and conducted in depth negotiations -- to elicit a feasible proposal from Microsoft that made strategic and financial sense for Yahoo!, but without success.

Translation: We didn't just try to get the deal done. We elicited.

Bostock & Yang: While Microsoft's search-only hybrid proposal may have been helpful to Microsoft, our board and management concluded it would have had a significant adverse impact on Yahoo! strategically, leaving the Company without the operational control of search assets and technology we view as critical to our objective of becoming a leader in the converging search and display advertising business.

Translation: Microsoft thought we were so irrational about maintaining control of our company that we would not notice that we were giving up control of our business.

Bostock & Yang: The board and its advisers also carefully studied the financial impact of Microsoft's proposal and concluded that it would have provided no meaningful improvement to our operating cash flow.

Translation: We need cash now, and we've already spent our tax refunds.

Bostock & Yang: In short, this proposal would have generated substantially less value for Yahoo! stockholders than Microsoft has suggested.

Translation: In short, our valuations and Microsoft's never seem to match up. They use the base-10 system. We think the numbers look so much more impressive in Base-8.

Bostock & Yang: Based on all the key factors -- strengthening our competitiveness, protecting our strategic position, generating attractive financial returns -- the Google agreement is far better than Microsoft's search-only hybrid proposal. That's why we moved forward with it.

Translation: Forward!

Bostock & Yang: Your Current Board of Directors Has the Knowledge, Experience and Commitment to Best Represent Your Interests and Maximize Stockholder Value.

Translation: The Icahn Slate of Directors Has No Knowledge, Experience or Commitment to Keep Yahoo Independent.

Bostock & Yang: The events of recent weeks underscore the fact that your board of directors is far better qualified to represent your interests in the effort to maximize stockholder value than the slate put forward by Carl Icahn.

Translation: They bet the farm on Microsoft.

Bostock & Yang: Based on Mr. Icahn's narrow agenda, it seems highly unlikely that either he or his slate would bring added value to Yahoo!.

Translation: Carl is so narrow. He thinks our shareholders are more interested in financial returns than in funding a fantasized battle of good-versus-evil.

Bostock & Yang: Consider the following:

Translation: Close your eyes, and let your imagination run free.

Bostock & Yang: Mr. Icahn put forward his slate so as to sell Yahoo! to Microsoft, even though he had no knowledge of the sustained efforts made by your current board and management to determine whether Microsoft was willing to engage in a transaction that would provide appropriate value and certainty of achieving that value.

Translation: Mr. Icahn thought we were greedy at $37, though he had no knowledge that we rejected $40.

Bostock & Yang: On June 8, Microsoft once again made it perfectly clear that it is not currently interested in acquiring Yahoo!.

Translation: ...at least anywhere near $33.

Bostock & Yang: Mr. Icahn publicly opposed any alternative form of transaction with Microsoft. Your board and management, after thorough and deliberate negotiations and evaluation, separately concluded on its own that the alternative hybrid deal proposed by Microsoft was, indeed, not in the best interests of the Company or its stockholders.

Translation: Mr. Icahn can smell an inferior deal a mile away. We prefer thorough and deliberate negotiations and evaluation.

Bostock & Yang: Mr. Icahn urged, as an alternative to a Microsoft transaction, that Yahoo! find a way to partner with Google that would not preclude a transaction with Microsoft in the future. We have done exactly that through the commercial agreement with Google we announced on June 12.

Translation: Microsoft called his bluff.

Bostock & Yang: Simply put, you can choose to vote for a slate of nominees with no articulated plan for the future of Yahoo!--and who now have essentially no alternative agenda to offer you--or you can choose to vote for your existing board of directors which has the independence, experience, knowledge and commitment to navigate the Company through the rapidly-changing Internet environment, execute on our strategic objectives and deliver value for Yahoo! and its stockholders.

Translation: Simply put, you can vote for his Beg-Microsoft plan or our Beg-for-a-Miracle plan.

Bostock & Yang: It is time for Yahoo! to turn its undivided attention to implementing its key strategies...

Translation: Many of you thought that time was five years ago.

Bostock & Yang: ...and we therefore urge you to reject Mr. Icahn's slate and his ill-defined agenda.

Translation: ...and we therefore urge you to reject the conventional wisdom that Yahoo is unsalvageable.

Bostock & Yang: We strongly urge you to vote your WHITE Proxy Card today for your current board of directors.

Translation: Please, Baby, please, Baby, please!

Bostock & Yang: We look forward to sharing our progress with you as we move forward
and we thank you for your support.

Translation: If the early vote totals look good for us, expect us to release those numbers to influence those who haven't voted yet.

Bostock & Yang: Sincerely,
Roy Bostock, Chairman of the Board
Jerry Yang, Chief Executive Officer

Translation: It's been a great ride so far,
Thelma and Louise