1. Which psychological phenomena might have been at play in leading Microsoft to make the offer it did to acquire Yahoo!?
2. Which psychological phenomena might have been at play in leading Yahoo!’s board to reject Microsoft’s offer?
3. Discuss the discussion of reference point heuristics in the press coverage of the Microsoft offer, and indicate whether the comments in the press are consistent with the actual merger talks between the two firms.
4. Estimate the value of the synergy associated with the projected cost savings of $1.5 billion per year, assuming that the stream of cost savings would begin a year after the acquisition announcement, and would last into perpetuity. Compare your answer to the size of the dollar premium associated with how much more Microsoft is offering to pay for Yahoo! than its market value on January 31, 2008.
5. Had Microsoft acquired Yahoo!, would the acquisition have been classified as a bad merger? The technical definition of a bad acquisition can be found in the end- notes to this chapter.
6. Identify behavioral issues associated with Microsoft’s decisions about capital structure and capital budgeting.
7. Discuss whether there are any behavioral issues associated with whether Microsoft pays for Yahoo! using 100 percent cash, or instead 50 percent cash and 50 percent stock.
8. Which psychological phenomena might have been at play in the negotiations between Carol Bartz and Steve Ballmer?
9. Financial economist Aswath Damordaran was quoted in The New York Times about the dangers of the Steve Jobs effect, whereby CEOs seek to emulate Jobs’s success in taking Apple from being close to failure to being extremely successful by developing new revolutionary products. He points out that there are many failed firms that sought to accomplish what Apple accomplished. Discuss the relevance of Damodaran’s perspective for Yahoo!
10. The minicase makes reference to some of the examples discussed in the chapter. Discuss the connection between the minicase and the other examples with reference to how the examples are mentioned in the minicase.
11. In September 2016, between the time that Yahoo! and Verizon negotiated the terms of their deal and the completion of the deal, Yahoo! announced its discovery that in 2014 a “state-sponsored actor” had breached its user database, which included names, email addresses, encrypted passwords, birth dates, telephone numbers, and security questions for approximately 500 million users. Then in December 2016, based on information provided by law enforcement investigating the 2014 breach, the firm announced that it had experienced an even more serious breach, in 2013, involving approximately a billion users. These types of breaches are potentially dangerous for users, in respect to its implications for their connections to their financial services and social media profiles. By some accounts, the average time it takes organizations to identify breaches is 191 days, the average time to contain a breach is 58 days after discovery, and the cost to remediate a data breach is $221 per stolen record. Yahoo! had previously experienced breaches in 2010 when the Chinese military successfully breached its system, along with those of other firms such as Google, and in 2012 when more than 450,000 Yahoo! user accounts were compromised. Although Google responded to the 2010 breach by investing heavily in cybersecurity, Yahoo! executives invested less heavily, partly because of a fear that their users would find that extra security measures would make using Yahoo!’s platform harder to use, which would result in users abandoning its plat- form. Conflicts over the strength of the firm’s security measures, between Yahoo! executives and its cybersecurity team, resulted in many security engineers leaving the firm. The timing of the September 2016 announcement raised the question of whether the 2014 breach conformed to the legal definition of a “mate- rial adverse change” (MAC), which would lead to a renegotiation of the terms of the Yahoo!-Verizon deal. Verizon’s reaction at the time was that they did not understand the full implications of the announcement, but would evaluate the possibility of renegotiating the terms of the acquisition agreement. Both breaches damaged Yahoo!’s reputational capital for offering secure web services. Yahoo!’s reaction to the 2014 breach was that because the original passwords had been encrypted, the risks were low, and that they notified their users to reset their passwords. Their reaction to the 2013 breach was less sanguine. After the announcement of the 2013 breach, Verizon stated that it was continuing to evaluate the associated implications, in respect to renegotiating the terms of the acquisition. Discuss any psychological issues associated with the data breaches described above.

Yahoo! was founded in January 1994 by Jerry Yang and David Filo, then graduate students at Stanford University. The firm grew quickly during the 1990s by offering the most user-friendly way to view the World Wide Web, and in so doing became an important revenue-generating portal. Yahoo! users had access to chat rooms, classified ads, and e-mail. They could follow sports, play games, view movies, follow real estate, keep their calendars, share files, engage in auctions, shop, and maintain an address book.

Three of the main ways that firms generate revenue from operating Internet firms are: selling ads, enabling transactions, and selling products that use the Internet. Yahoo! generated revenue by selling ads that were dis- played alongside its content. By 1997, its ad revenues were $70.4 million, and in the next year they increased to $203 million. Under the leadership of its CEO Tim Koogle, Yahoo!’s share price soared during the dot. com bubble, peaking at $118.75. In the aftermath of the bubble bursting, its stock price declined to $8.11 and Koogle left.

From 2000 through 2007, the firm expanded its activities into new areas. Examples are dialup service to compete with AOL, Internet search, social networking, and photo sharing. Throughout its existence, it grew and entered new businesses mostly by making acquisitions, such as the photo sharing firm Flickr. In 2002, Yahoo! added ads to search results. That year the firm’s revenue was $953 million. In 2003, its revenue was more than $1.6 billion and in 2004 it was $3.5 billion.

Exhibit 10-4 displays the time series of Yahoo!’s market capitalization, which peaked at $128 billion, $20 billion more than that of Berkshire Hathaway, Warren Buffett’s firm. The firm expanded globally, especially in Asia. In 2005, Yahoo! invested $1 billion to acquire a 40-percent stake in the Chinese Internet firm Alibaba, which was little known at the time.

Despite its growth, then-CEO Terry Semel was unable to set a clear strategic direction for the company. Semel had unsuccessfully sought to remake Yahoo! as a media company. Moreover, as Yahoo! had grown into a mammoth portfolio of unfocused Internet services, other Internet firms were focused on single products that would successfully compete with Yahoo! services. These were eBay in auctions, Google in search, Craigslist in classified ads, and eventually Facebook in social media. This intensified competition, and lack of a clear focus by Yahoo!, resulted in a decline in Yahoo!’s revenue growth and earnings.

Beginning in 2005, Yahoo! and Microsoft engaged in discussions about a possible merger. These discussions continued through 2007, but were unsuccessful. During the prior decade Microsoft had not been particularly innovative, despite attempts to be so. For example, it sought to develop a significant upgrade to its core product line, the Vista operating system, but Vista was late to be delivered and had far fewer features than its customers expected.53 The firm also offered...