If Yahoo wants to fend off a 60% premium hostile offer, close to the ONLY thing it can do is to buy eBay inorder to make itself so big and the potential hostile merger so dilutive that Mr. Softie would say no thank. Chances of this happening is close to 1%.

If Yahoo + Microsoft does happen, eBay can kiss its chance of being acquired goodbye . . . and thus, it better figure out a plan to turn itself around quickly or the stock price will tank cause there will be no potential acquisitions around to artificailly pump up the stock price. (why the hell did eBay go up 7%? today?). Outside of a merger/acquisition by Yahoo or a straight up acquisition by Microsoft, I really dont see anyone with a modicum of strategic fit with eBay. Google is way way too proud/smug to be interested in a web 1.0 business . . . and even just looking at it financially I dont think there are many companies out big enough to buy ebay at a $30-$40B price tag. (adobe is the only one and thats really farfetched).

Another note. MSFT really saved the stock market today. Instead of crying recession wrt to the Google miss . . . the market was pumped up by the acquisition offer . . . and since most wall street models (quant and fundamental houses) use some sort of comparable valuation model, the jump in Yahoo really help keep the rest of NASDAQ afloat . . . that said, this is a short term thing. . . great time to play short on the market starting monday.

Meg is leaving eBay and handing it off to John Donahoe. It’s big enough news to bring me back to my keyboard to riff some more.

I cant believe the negative press Meg has gotten in the last few month. In the “what have you done for me lately” world of business (and especially tech ) media and punditry. . . you would have thought that Mark Zuckerberg was/is a more successful CEO than Meg. If you look at the numbers its simply not true. I certainly agree with those that Meg had the winds at it back cause of eBay’s business model (network effects) but the 1990’s dot com generation is littered with great concepts/business models with incredibly strong initial traction . . . but failed to live up to its early promise due to incompetent execution . . . friendster, webvan, netscape . . . to name just a few. . .

But enough kissing ass , I do have a few a few honest thoughts about eBay’s challenging future.

John Donahoe: Buyers and sellers have more choices and higher expectations than in 1998, but the guiding principles are the same—the best values, the widest and most abundant selection, and a fun shopping experience. We will make it easier and safer to shop on eBay. The second thing we are going to do is build on this fabulous auctions business that is unique and is the best format for many items.

But we have used an auction approach for fixed price. We are not optimized to get those values in fixed price. Time-ending-soonest makes sense in auctions, but does not surface the best items in fixed price.

In the past 12 month, eBay has been “re-focusing” on the auction business through its TV advertising (emphasizing the joy of winning) and raising prices on stores items to re-emphasis on auction listings and the core marketplace. This new strategy to focus on fixed price is certainly a retrenchment and an admission that the path it had been following for the past 12-18 month was wrong. eBay’s problem (as I had always believed) is driven by a few factors 1) that it owns 100% of the auction market already and 2) google through its search engine has the aggregate inventory of all “listings” which threatens eBay’s position in the market for breadth and selection (and thus as a destination). In the fixed priced context, it means that fixed price (and non-auction) “advertising” is its only growth engine left and that shoring up its core auction business is not likely to deliver the growth so enamored by Wall Street through Google.

That said, we must be in distributed commerce in the future, taking listings for auctions and Shoppng.com and distributingthem to other sites. If they ar not going to come to us, we are going to come to them. We are not at all averse to distributed commerce.

Donahoe: In many ways, our buyers will lead us there. We are making it much easier to bring eBay listings to your Facebook page, Myspace page, and shopping listings to various sites. eBay’s unique inventory offers better alternative [than other sources].

This eBay listing widget as an “ad unit” concept is not new. In June of 2006 it announced its AdContext program which used to be located at “http://affiliates.ebay.com/ads/adcontext/” - if you click through these pages no longer exists. No sure what happened but it was certainly in Beta for a while but never released publicly. Did the company lose focus? Did the company not have the technical chops to create a contextual advertising algorithm? If it didnt work as a business, why does parading it out again (re-treading an old idea) make it better this time? And lastly, why did it take so long?

Donahoe: In payments, we are enabling faster checkout and easier payment on thousands of Websites off of eBay. In reputation, we think that reputaion is something we can increasingly outtake.

Whitman: We wonder if there is a way to embed reputation into Paypal. Is there a way to travel across the Web with your Paypal wallet and some other aspect of reputation?

Reputation . . . this is a huge opportunity for Paypal . . . but something that also took YEARS to bubble up to the executive ranks. eBay cannot continue to rely on consultants to filter out the latest “trends” and re-package it in digestible powerpoint speak for any idea to be relevant. Bill Gates recognized this early and had a team of recently out of college “technology advisors” (aka geeks) to keep him grounded and abreast of the latest changes. eBay’s executive team must learn to be the same . . . in many ways the most junior people (usually cause they are younger) at eBay was most ahead of the the times. In the end, people making the decision cannot rely on data spoonfed to them in a powerpoint, they need to write a blog, try to get 500 friends on myspace, play vampire/werewolf on facebook, learn RoR, go on a WoW raid, and adopt a penguin - to become a consumer of technology in it purist form (dirty, aimless, useless, emotional - completely non strategic) as to be able to not just absorb information and data - but challenge it and form opinions based on a holistic understanding of all the trends thats happening in the internet - not just the topic at hand.

eBay took an “impairment” charge for the Skype acquisition today of $900M . . . its totally hilarious how people that do not really understand accounting & finance are interpreting this action.

First of all, here is a technical definition of impairment charge. In short, when Company A buys Company B. Any amount of the purchase price above what the book value of Company B is put onto the balance sheet as goodwill. That goodwill is charged as a deduction from earnings every quarter for up to 40 years (something like that).

By reducing $900M from the goodwill of the Skype transaction, eBay is taking that one time hit this current quarter while decreasing its future goodwill amortization amount in earnings.

Couple important back of the envelope calculation first. . .

Skype was bought for $2.6B in 2006. The earn out ended up being $530M. Not taking into consideration time value of money, the total acquisition cost was around $3.1B.

Skype is doing about $90M a quarter. Conservative projection would be that Skype is on track to about $500M in revenue for the forward 4 quarters. Given that these are probably high margin revenue (p2p means no hardware cost), I would give the company a conservative revenue multiple of 10x. (aQuantive was bought for 7.6x revenue multiple - a much lower margin business). The resulting number would be that Skype is probably worth around $5B TODAY.

Ok, so eBay probably overpaid for Skype 2 years ago. But today Skype is certainly worth more than that acquisition price. So the question than becomes, why is eBay taking $900M impairment charge?

hmm . . . thus goes the intrigue . . . . if you guys noticed, eBay stock price started down after the news, but actually went up afterwards. For the fundamental investor, the explanation would be that Skype as a failure is already priced into the stock price. I, on the other hand, believe in the power of market manipulation investor relations . . . i.e. eBay got on the phone with institutional investors after the announcement and detailed the rationale of the write down and the going forward financial strategy for the company. The mutual funds must have liked what they heard and bought up the stock.

I don’t want to insinuate anything but write downs are a well-known financial engineering instrument. . . it has absolutely nothing to do with admiting failure or not on an acquisition. The “when” is much more important than the “why”.

I’ll say this. eBay WILL exceed earning estimates for the next 2 quarters. Either they are so confident of the future to take this hit today OR . . . . . . (click here for research)

From Long Short Capital - the “Llama of Lame.”

This is exactly how I feel about the current rate cut . . . that Helicopter Ben is raining worthless money on the “poor and huddled” masses of wall street while the rest of the country suffers the effects of stagflation in the not too distant future. America’s inability to take the bitter pill will turn the economy into the mess that was Japan in the 90’s.

I would wholesale copy and paste the entire post if I could, but that wouldnt be right . . . just click over the read it . . .

You suck. You don’t have a backbone and as a result you are slowly and very surely making our country and our currency irrelevant. Usually the masses rebel and bring down great empires but luckily for us democracy fixed that problem. Unfortunately, democracy can’t fix how lame and fickle you are and so you will be our ruin.

1) Inflation isn’t 2% like your pathetic CPI ex-Food & Energy says it is.

2) Grow a spine you slimy invertebrate

3) You’re lying to yourself if you think we still have real GDP growth in this country.

It’s like a company doing a 5 for 4 reverse stock split every year and claiming to have 20% eps growth, you haven’t changed the earnings just the units those earnings are measured in. The rest of the world is telling you our country is worth less by massively selling our currency and you still naively think we’re growing value - I feel like I’m at a gathering of the flat earth society or in Zimbabwenomics 101.

eBay just launched an application on Facebook called (unimaginatively) eBay Marketplace. As of now, there are only 250 people on the app so I’m guessing its only in beta. Otherwise just by encouraging the employees to get on, it would have a huge number of users.

There are a few cool features. For one, you can actually “push” an eBay item to your friends’ watch list. For another, you can solicit comments from friends on items you are looking to bid on. All very cool. . . I was surprised a third party app hasnt been launched to do exactly the same and make some money off eBay affiliate program (damn, another item crossed off my crazy idea to-do list).

Another thought is that Facebook has it’s own “marketplace” application which is somewhat competitive with this ebay app. Wonder what they will do. Speaking of conflict of interests, given that Rock You’s “super wall” has become such a big hit, it is inevitable that Facebook enhance the its own “wall” application to allow embeded codes. . . When that happens, I wonder if people are going to start screaming the usual “extend and embrace” MSFT-ish rants about Facebook stealing ideas from its api partners.

Not letting eBay off the hook either, why hasnt eBay’s own social networking app “My World” been given the same the same functionality? My World is a 2001 implementation of a social network . . . ie more like friendster than myspace (win on personalization) or facebook (win on relevance).

Analysts in the advertising industry have been debating for ages why it was critical for Google to build out its non–search properties. One of the most commonly stated reason has been that these additional products can help Google improve its search engine AND its advertising network (both via personalization) by creating a deeper and more consistent behavioral profile of its users (via a login + cookie rather than cookie alone back in the age of Google search)

Well, 3+ years later, Google is seen marching towards that vision pretty unapologetically and brilliantly.

In the mean time, Yahoo sat on its ass and squandered the goldmine of data that it has gathered from its users since 1996. For whatever reason (panama? privacy concerns?), Yahoo not only did not build out its off site ad network, it also failed to leverage those user data to do a better job for its internal display ad targeting. Obviously, simply using SmartAd within Yahoo is a no brainer, the real power would only come after Yahoo has successfully build out its network and Yahoo could track user behavior across the web.

Man, what a waste.

(BTW, the real-time generation of display ad copy and design for targeting purposes is actually pretty cool)

Marc Andreessen’s blog is surprisingly great for non-tech related topics.  Its already raised to the top 10 feed in my feed reader in short couple of months.  Anyways, with the Blackstone IPO all over CNBC this morning, it got me thinking about how LBO funds differ from traditional investments.  I have tons of useless and never applied finance/asset management education . . . so this post by Marc really resonated with me. The most important part is:

What part of the excess return over the S&P 500 index that you are expecting to generate is due to your use of leverage (debt)? Does this indicate that the public companies that you plan to buy are underleveraged? The finance theory of leverage is that a company should take on debt until its cost of that debt is greater than the returns it can generate from that debt — what happens to your model and projected investment returns if public company shareholders and CEOs figure this out and add more debt before you are able to buy them? Further, if what you are really doing is leverage arbitrage versus the S&P 500, why can’t I just buy an S&P 500 index position myself and leverage it up by purchasing call options and get the same result for a fraction of the fees?

Here is the thing, the returns for LBO funds (like Blackstone) looks great compared to the S&P500, but its actually (somewhat of) an illusion.  A large percentage of LBO fund return is from borrowing money to purchase equity which creates an amplified return on a smaller base of actual cash investment.  (think getting a mortgage to buy a house and the price of the house goes up).  Thus you and I can actually mimic blackstone by simply borrowing money to buy the SP500 without having to pay the 30-40% "carry" on the investment profit that LBO funds ask for.  Average joes, regularly borrow money to buy houses,  the same can be done for the index. The only problem is that its (very much unrationally) much much easier to borrow against real estate than it is equity. (that is also why we have a real estate bubble right now).

So the harder question to ask is that what ever fund you buy into (including the Blackstone IPO) are they 30-40% better than what you would get through a simple margin purchase of the index? My guess is that only the top 10% of LBO funds will be worth it (including Blackstone) but most of the other funds are just juicing return by taking on more risk . . which you and I can do pretty easily without paying someone to wear

$3,000 Zegna suit, $400 Turnbull & Asser shirt, $80 Pantherella cashmere socks, $900 A Testoni alligator loafers, $5,000 Omega watch, $500 Gucci cufflinks, and $150 Hermes tie

I love wall street humor

This is a big weekend for the eBay seller community because of eBay Live in Boston. Its a huge bash . . . and generally lots of good feelings all around (sprinkled with some encouraged honest venting as well). Well, it looked like Google planned to crash the party and got the heisman . . .

I remember in 2005 Alibaba pulled the same stunt and gave away mp3 players at a hotel suite next door to the convention center. (sad to say I didnt get one but not because I didnt try! . . . ) Not sure if it was effective at all except it helped expose the poor quality of no name chinese made mp3 players.

I believe eBay and Google still have a detante as far as open warfare, but this is still a crack in the facade. We now know what are the first few cards each side will use when open warfare starts . . . Perhaps Google gently provoked eBay just to see what eBay’s first move might be (brilliant!).

I certainly hope that eBay has all the scenerios planned out (actually I’m pretty sure they have given how meticulous the whole place it) cause the first card they showed Google is certainly a face card and you have to save your better cards for the end. If open hostility does happen, it wont be pretty for everyone. Google probably knows exactly how much revenue they would loose which not only includes direct spendings but also the incremental bids eBay’s ubiqitous adword program generates. eBay on the other hand probably knows all the transactions Google helps drive from NATURAL as well as PAID search as Google will likely blacklist the entire eBay site from its index as the last resort.

If they do so (wipe ebay.com from its index), the act will no doubt be labled and considered “EVIL.” For quite a long time, Google has pointed to the integrity of its organic search results as something they will not compromise for its own interests. (eh. . . ex China ). As bad as this action will be for eBay, long term, it might be even worse for Google as it will forever have to throw away its “do no evil” mantra and come to the self-realization that they too are willing compromise the user’s experience and interests to win at all cost . . . MSFT lost its ways in the early 90’s when it started down this road . . . and it is still trying to rehab that image despite almost a decade worth of PR and hard work.

Hubris . . . this need to “win” against the competition despite all else. . . has and will continue to be the downfall of the mighty.

Another random thought, I took a college class a long long time ago on nuclear warefare/politics and the principles of MAD - Mutually Assured Distruction during the cold war. Using game theory, the logical Nash equilibrium would predict both parties will not provoke eachother ONLY IF both sides remain equally likely to destroy each other if conflict breaks out. So ironically the best course of action for BOTH eBay and Google would be to not only continue to maintain the status quo but also to INCREASE the mutual dependency of both companies - raising the stakes if you will. And thus, coopetition is not only a product of the wierd dynamics of the technology industry but the LOGICAL and RATIONAL thing to do!

There is actually a really good article over at news.com over the usability testing travails of hotmail 2.0. . I can’t tell you how many times I’ve been in exactly the same situation . . . trying balance innovation, strategy, and immediate user feedback.

The program was too slow to load, too different and, well, just not like the old Hotmail it was intended to replace.

It was a painful realization for the more than 100 managers and developers on the project. In banking on a snazzy Web 2.0 application to try to catch up to rivals Yahoo and Google, Microsoft had dramatically overshot its audience.

Classic mode wasn’t the only bitter pill the development team had to swallow. Even in the full version, it turned out that many customers still wanted to select messages using check boxes rather than a mouse click or keyboard shortcut, much to the dismay of Microsoft’s programmers.

“They were digging in their heels,” Sim said.

In the end, users hates any types of change (good or bad) . . . they will eventually adopt changes that are clear improvements, but that will still take a while. . . there is no such thing as a magic switch in the first place.

People that believe being “customer focused” is the ONLY goal of any product manager doesnt really understand innovation and strategy (ie innovator’s dilemma). On the other hand, product managers that are married to pushing the envelope on innovation and un-reasonably attached to their frameworks (information architecture, product strategy etc) really belong on Sand Hill road instead. There is a middle ground but its a case by case basis . . . knowing when to turn back (like the hotmail team) is a good first step. For all of MSFT’s faults, I’m actually quite impressed by this story.

Another random note, M&A teams of major companies are usually completely clueless on stuff like this. They believe that 1+1 = 3 while in reality 1+1 = 1.5. For example, taking a popular rumor over the weekend, if Microsoft and Yahoo merged what would be the combined userbase of their instant messaging product in 12 month if they tried to merge the two clients into one product? It would for sure be less than the combined marketshare of the two clients currently. The disastrous Sprint + Nextel merger was another perfect case study . . .

The blogosphere likes to report rumors as facts and edit post title accodingly in real-time as information changes. Om has some coverage (with the required hedging) while techcrunch is not hedging at all.

I have some random thoughts, not very coherent at all, but all pertaining to the transaction.

First of all, I love stumbleupon. I installed it about 4 years ago when I read about it in PC Mag, and I sincerely believe “browsing” is beginning to take shares away from search (more here and here) as a discovery methodology. So I say this is a smart move.

However, I did hear from my Yahoo buddies that they took a look at StumbleUpon (for an acquisition) and found that the active user base to be much lower than downloads. (sour grapes? ) For whatever its worth, I would think 3-6M users would be a $xxxM transaction but the rumored price is a little bit lower.

I also talked to some smaller websites and they have been telling me that StumbleUpon has been increasingly becoming a major source of traffic. (biggest ramp was 6 month ago, and now its a little flat). However, the traffic themselves are not very sticky (just stumbling through).

As Om mentioned, eBay beat out Google for the the acquisition. I wasnt surprised at all. Josh K. of First Round Capital is an eBay alumni (Half.com founder) and the driving force behind StumbleUpon’s board. David Feller (co-worker and friend from eBay) is StumbleUpon’s VP of Marketing and is also an eBay & Half alumni. Josh and Dave knows eBay inside out and have access to the very top of the company as well as the very buttom. Transaction among friends are usually more honest and straight forward . . . who wants to deal with Google’s cocksure M&A team? and un-certain integration strategy?

Ok so lastly, what can eBay do with StumbleUpon . . .

- eBay auction toolbar is one of the stickiest applications eBay has. This could potentially give the functionalities in the eBay toolbar some distribution on the SU toolbar. (wanna stumble on some auctions?)

- Phishing is THE reason user trust on eBay and PayPal is so hard to improve. Paypal and eBay are working overtime on creating industry working groups and blacklist databases to solve this problem. SU is the missing link to the end user to allow for distribution of the warning systems to the browser.

- Skype + SU toolbar are ways with which Paypal can creat a persistent wallet on the “browser-top” which would be significantly more convinient than hunting down the wallet. (as always I believe Paypal is the main benefitiary of most eBay acquistions)

- eBay can exert more leverage in the search game . Firefox generates $100M+ in revenue a year simply because google is the default homepage. Having the search box on the toolbar makes eBay in control of the user relationship while making search engines depend on it (for once!) for traffic. (there is some HBS case study on this. . . I think its called the “judo strategy”)

- I wonder how the Skype ToolBar is doing. Maybe its doing really well and StumbleUpon would be a good source of distribution for its functionalities too.

- I’m unsure what eBay is planning to do with SU’s small but growing advertising inventory. But maybe eBay does have grand ambitions on running its own ad network.