The current situation at Yahoo! has precipitated all sorts of speculation on the future of the Sunnyvale-based Internet pioneer. Much has been reported on the now-withdrawn Microsoft bid, Carl Icahn's $49B price tag and his attempt to oust CEO Jerry Yang and other members of the Yahoo! Board. There's also been talk of an acquisition by Google, fueled by founder Larry Page's public comments and technology compatibility assessment between the two companies.
Who is going to buy Yahoo!?
"Who's going to buy Yahoo!?" has been dominating water cooler talk across Silicon Valley. The question actually breaks down into three separate inquiries:
- Who can afford to buy Yahoo!? (Money);
- Who needs to buy Yahoo!? (Motive); and
- Who will be allowed to buy Yahoo!? (Permission).
Among the current players, both Microsoft and Google meet the first two criteria. They can afford to buy Yahoo! and have a strategic reason to buy Yahoo! However, both companies have trouble meeting the third prong of the inquiry. At the moment, neither company seems able to obtain permission to buy Yahoo!
For Microsoft, the main permission challenge is bridging the (actual or perceived) culture divide, although the outcome of Icahn's proxy battle will have a major impact on this. Also worth noting is that an acquisition of Yahoo! by Microsoft would put around 70% of web-based communications (email and instant messaging) capabilities in one entity. For Google, the permission challenge is not so much cultural, but legal in nature. Assuming Google wants 100% of Yahoo!, such a deal would be intensely scrutinized by the federal government to guard against anticompetitive monopolies in two areas: 1) Search; and 2) Online Advertisements. A combined Yahoo-Google entity would hold over 80% of the share in both markets.
Suffice it to say that there are hurdles for either company.
So who's going to buy Yahoo!? Here's one you may not have heard: acquisition by an Asian entity.
It's an interesting scenario, but could it actually happen? In this article, I'll walk through some of the legal issues that would be involved if an Asian entity made a play for Yahoo!
The Legality of a Foreign Acquisition
Again, any acquisition of Yahoo!, whether foreign or domestic, would have to survive a three-part litmus test: Money, Motive and Permission.
In terms of the first prong, both India and China seem to have the money. According to Asia PE Research, a Hong Kong-based research firm, the total value of private equity deals throughout Asia was $42.2 billion in 2007 and $53 billion in 2006. Clearly, a single purchase of around $50 billion would be a stretch for a private equity group, but not completely out of the ballpark for a government-backed bid.
Which brings us to motive. Why would a country that takes a fairly restrictive attitude toward the Internet want to own the world's top web destination? According to the Chinese Ministry of Industry and Information, China has 221 million Internet users, which ranks first ahead of the U.S. This fact alone provides impetus for Yahoo! ownership. China is also actively engaged in business with Yahoo! and has a history of bidding on its partners. In February 2008, China tried to acquire 3Com, one of the companies building its technology infrastructure.
Money and motive aside, the greater challenge for an Asian acquisition of Yahoo! is the permission hurdle. While Chinese investment money is welcome in the form of debt, bids to acquire U.S. companies have been met with hostility.
Under the Foreign Investment Study Act of 1974, any foreign investment over 9.9% in a U.S. company must be approved by the U.S. Treasury Committee on Foreign Investment in the United States (CFIUS). Thus, any 100% acquisition of Yahoo! by a foreign entity would have to pass CFIUS scrutiny.
In October of 2007, the CFIUS passed the Foreign Investment and National Security Act of 2007 (FINSA), an amendment of Section 721 of the Defense Production Act of 1950. FINSA states: "The United States has traditionally welcomed Foreign Direct Investment (FDI) and provided foreign investors fair, equitable and nondiscriminatory treatment with few limited exceptions designed to protect national security. . . The intent of [the amendment] is not to discourage FDI generally, but to provide a mechanism to review and, if the President finds necessary, to restrict FDI that threatens the national security."
National security has been the deciding factor in recent attempts by Chinese investment to acquire U.S. companies. For example, the CFIUS did not approve the acquisition of 3Com by Huawei Technologies in February 2008. In 2005, the federal government stopped the purchase of Unocal Corp by the China National Offshore Oil Corporation. Both full acquisition deals were blocked on national security grounds.
Finance, telecommunications and aerospace industries are considered high risk areas for foreign investment, while industries like biochemistry, building equipment and consumer electronics are considered low-risk by the CFIUS.
The CFIUS is not a rubber stamp for rejection, however. In 2005, the CFIUS did not curtail the full acquisition of Maytag by Haier Group, a Chinese manufacturer of household appliances. Arguably, the CFIUS might not view the acquisition of Yahoo! as putting American national security at risk because the Sunnyvale giant: 1) is not strictly a telecommunications entity; and 2) provides purely consumer services, as opposed to government services.
An Asian acquisition of Yahoo may, however, trigger serious privacy issues that implicate American security interests. Specifically, thousands of private U.S. citizens' email accounts would be at risk if a foreign entity not subject to U.S. privacy protections were to acquire Yahoo!
Conclusion
On balance, the scale tips against an Asian private equity or government-financed acquisition of Yahoo!, primarily because the requisite permission would be very difficult to obtain. Foreign direct investment in Yahoo! would have to be under 10% to avoid scrutiny by the CFIUS.
So, who's going to buy Yahoo!? Whoever can show the Money, Motive and Permission.