Feature By John Batho

Yahoo! acquisition: something to cheer about?

Microsoft’s plan to buy Yahoo! raises a number of it is in this for the long haul and is prepared to instigate a proxy important branding and trademark considerations in fight if necessary. It has until March 14 2008 to submit its own directors for approval at the next Yahoo! shareholder meeting, terms of both the minutiae of the deal itself and which is currently scheduled for June. In response, Yahoo! has leaked the implications for the online advertising market proposals of an offer to enhance the severance packages of key employees in case of layoffs following a change of control, which it hopes will scare off Microsoft (or at least frighten it just enough to increase its offer). At this point in time, despite Yahoo!’s reservations, a deal with At the beginning of February 2008 Microsoft Corporation Microsoft seems increasingly likely – whether undertaken willingly announced details of an unsolicited offer of $44.6 billion for or unwillingly. But while it is still very early days in what looks likely internet company Yahoo!, which at the time worked out at $31 a to be a drawn-out process, Microsoft’s legal team, and its trademark share. Should the deal go through, it will be the largest ever takeover lawyers in particular, will have already carried out a significant in the technology sector and the ramifications for brand owners amount of work. “When a company decides to extend a takeover could be significant. It may, for example, forge an adversary strong offer to another company, there clearly has been quite a bit of enough to compete with Google in the online advertising market. activity leading up to it,” says Leigh Ann Lindquist, a partner with But Yahoo! is not about to give up without a fight. It rejected the US IP specialist Sughrue & Mion PLLC. “Both in-house and outside initial bid, claiming that it undervalues the company, and has been counsel would have spent hours drafting documents, while business busy eyeing up other potential partners. However, plans for a tie-in personnel and economists were weighing the benefits and with Google look to have been wishful thinking and rumoured interest downsides to acquisition, as well as the costs and potential revenue.” from Rupert Murdoch’s News Corporation seems to be fading fast. The latter deal would reportedly involve News Corp handing over Brand value various online properties, including the social networking site One of Microsoft’s key concerns in the early stages of preparing its bid MySpace, and some cash to Yahoo! in return for a stake of about would have been the extent to which the value of the Yahoo! brand 20%. This looks good on paper for News Corp, depending on the affected the overall value it put on the Yahoo! business. “For a company value placed on MySpace, but it is less clear what benefit there is for like Yahoo!, which has relatively little stock, property or plant and Yahoo!. The reason for Yahoo!’s current difficulties, which have exposed it to Microsoft’s unsolicited approach, is not generation of internet traffic; rather, the problem is turning that traffic into revenue streams. While MySpace would potentially provide Yahoo! with millions more users, News Corp has, itself, yet to figure out a successful way of generating advertising income from those users. For many observers, the proposed News Corp deal bears the hallmarks of a desperate attempt by Yahoo! to force Microsoft to raise its bid. As does the rekindling of its supposed interest in purchasing ailing internet service provider AOL, which it tried to buy from TimeWarner three years ago. A buy-out or partnership with AOL would, in theory, allow Yahoo! to focus on its key strengths of content and services, but would not necessarily provide it with more income. Online advertising is where the money is and AOL is fast losing customers. It remains to be seen whether Yahoo!’s strategy of cosying up to anyone other than Microsoft will have the desired effect and force the software giant into sweetening its bid. Microsoft has stated that www.WorldTrademarkReview.com March/April 2008 World Trademark Review 37 Feature: Yahoo! acquisition: something to cheer about? Competition issues

In addition to branding matters, Microsoft must also have considered the potential competition issues surrounding its proposed takeover – something it will be attuned to following its recent skirmishes with the EU competition authorities over the "unreasonable" prices it charges rivals for access to its dominant software. In a recent contribution for WTR’s friends at Intellectual Asset Management machinery, a large part of the value of that company is likely to be magazine, Dr Hans Friederiszick, managing director of ESMT intangible,” says Mark Holah, an IP expert at Field Fisher Waterhouse Competition Analysis provided the following advisory: LLP in London. “Yahoo! Inc has been named as the applicant in This is a two-pronged issue of competition and privacy and approaching 1,000 patent applications, which will make up a will be treated as such by the competition and regulatory significant part of the intangible assessment, but even so, the perceived authorities in both Europe and the United States. Competition value of the brand is likely to be a major factor in Microsoft’s valuation issues will focus on the question of whether this will encourage of the Yahoo! business.” unilateral price increases for internet advertising via search Microsoft itself has acknowledged the importance of Yahoo!’s engines given the already high level of concentration in this brand to the deal. In a recent statement to employees, Kevin market. This merger will reduce the number of search engine Johnson, head of Microsoft’s platform and services group, stated providers with significant global reach from three to two, paving that: “Yahoo! has a very strong brand and we are committed to build the way for a tight duopoly in these markets. As such, the EU on the Yahoo! brand as a major part of the combined products and competition authority is right to scrutinize carefully ongoing services we [would] deliver to customers. How we integrate mergers in this industry. Microsoft’s and Yahoo!’s brands, products and services is the type of This merger is anything but clear cut. While the search-engine decision that would be made ... by leaders of both companies.” marketplace is highly concentrated, the authorities could take the Although it is impossible to divide the initial $31 per share price view that the proposed merger would in fact be pro-competitive into components (eg, $10 for Yahoo!’s patents, $5 for Yahoo!’s by creating an organization with the strength and clout to vie trademarks and copyrights), reports from brand valuation specialists more effectively with Google for market space. In turn, Google can provide some assistance in assessing Microsoft’s likely valuation may welcome this move as it allows Google to argue that its likely of how much the Yahoo! name is worth. At the beginning of 2007, UK dominant position is contested by an equally strong player. company Brand Finance published its “BrandFinance 250” report on Whether the merged entity will have this potential remains to be the world’s most valuable brands. According to this report, Yahoo! seen. In any case, one barrier against approval for the proposed was the 102nd most valuable brand in the world and was worth $7.45 merger may be the relationship between the European billion, or around 25% of its December 31 2006 market capitalization Commission and Microsoft, following its strategic use and abuse of $30.25 billion. The figures are now somewhat out of date, but they of interoperability. If Microsoft were to bundle search and give an indication of the numbers Microsoft must have had in mind advertisement facilities into the Windows operating system, this when it submitted its offer. However, whether the figures quoted would certainly be a cause for concern. represent value for money depends on whom you ask (see “Brand It would be desirable to see the US and European authorities valuations in M&As” for more insight into Brand Finance’s brand act with some concord on Microsoft’s proposal, although this is valuation methodology). incredibly challenging. The proposal is a perfect illustration of the challenge of globalization to competition authorities. These are The lawyer’s role two international businesses where the competition issues plainly It is important to stress that a trademark lawyer’s task in an need to be addressed across different jurisdictions, yet the market acquisition is not to determine the value of the brand; instead, he or outcomes and impact in those jurisdictions are very different. she is there to ensure that the marks are what they appear to be. Even so, there have been great strides in reaching such a dialogue “Any prudent purchaser of a business will review the level of in recent years. But whether Europe will agree on the threat to protection of the brands it is purchasing to ensure it can trade consumer privacy, given the more interventionist attitude on this under those brands and enforce those rights,” notes Holah. side of the Atlantic, remains to be seen. In the United States, Yahoo! holds almost 200 registrations and pending applications. These include the famous YAHOO! mark, but also RIGHT MEDIA, HOTJOBS and SMARTVIEW, among numerous conduct a preliminary investigation into Yahoo!’s holdings in those others. Yahoo!’s international portfolio probably contains well over jurisdictions.” 1,000 registrations and pending applications, and Microsoft is likely For the key markets, Microsoft would need to know whether to have called upon practitioners around the world to participate in Yahoo! had obtained registrations for its most important brands. its investigation. “Although online databases are relatively easy to “This involves ensuring the ownership of the relevant brands is clear use and provide information inexpensively, the information is not and unchallenged, so an assessment will be made of any always detailed enough or necessarily accurate,” says Lindquist. outstanding disputes,” explains Lindquist. “It would also want to “I would expect that Microsoft contacted trademark counsel in the confirm that those registrations were not vulnerable to cancellation, markets deemed most important and valuable, asking them to at least on their face.” In addition, Microsoft would want to know

Extracted from “BrandFinance 250” – a report on the most valuable 250 global brands of 2006

Rank Brand Parent Industry Country Enterprise Brand value Brand value/ Brand rating company of domicile value ($M) 2006 enterprise ($M) 2006 value (%)

2 Microsoft Microsoft Software US 248,010 37,074 15% AAA+ 15 Google Google Inc Internet US 133,237 24,687 19% AAA+ 102 Yahoo! Yahoo! Inc Internet US 30,246 7,445 25% AA-

Source: Brand Finance

38 World Trademark Review March/April 2008 www.WorldTrademarkReview.com whether there were any current challenges to Yahoo!’s marks either in an administrative proceeding or before the courts. Lindquist points out that in the United States, one is able to obtain the file histories for pending applications and registered marks. The US Patent and Trademark Office also maintains information about opposition and cancellation actions on its website. However, she suggests that this information may not be as readily available in many other countries. “Instead, knowledgeable counsel in those jurisdictions could provide information about Yahoo!’s holdings and whether Yahoo! was a party to any pending litigation.” Holah adds that it is also prudent to review any licences and other agreements in place, to ensure that all third-party rights to use the brands are understood. Such preliminary investigations are crucial, but, according to Lindquist, the trademark practitioner’s role becomes even more important after a bid has been accepted. “At that time, trademark counsel must conduct a thorough due diligence review of the entire trademark portfolio to determine the current progress of the registrations and pending applications, and to assess the status of any pending litigation,” she says. “At the moment, any due diligence review of Yahoo!’s portfolio appears to be some way off.”

Microhoo! v Google Google must be watching events unfold very carefully. A marriage of Microsoft and Yahoo! would create a Goliath in the technology sector, with a strong position across nearly every online product, including email, instant messaging, news, photo storage and search. It would also bolster Microsoft’s online advertising business, which Above currently faces challenges because it has access to a much smaller A marriage of Microsoft and Yahoo! would create a Goliath in the number of users than its competitors and therefore is an technology sector afterthought for many customers. “Microsoft clearly intends to use Yahoo! (in combination with the MSN sub-brand) to take back market share from Google,” says Holah. Would trademark owners welcome a powerful competitor to Google? “On one level, having such a dominant force as Google If Microsoft chooses to means that mark owners can concentrate most of their resources on Google, both in terms of negotiating with that company and in implement its own version of terms of monitoring and buying keywords,” notes Holah. On the other hand, Google’s dominant position in the market allows it to be Adwords, it would find itself aggressive, whereas with more competition, Google might need to be more amenable and sympathetic to the views of mark owners. on the horns of a dilemma What is at issue here is Google’s controversial Adwords programme, which, as we all know, allows for the sale of third-party trademarks as keyword triggers for sponsored ads. Effectively, this allows anybody with a few dollars to buy a trigger word and potentially trade on the back of someone else’s reputation. market? If so, how does it propose to attract more advertisers and so Understandably, there is frustration from trademark owners which raise revenues? Google’s business model is undoubtedly highly complain bitterly about exploitation of their brands in this way by successful and Microsoft’s task would be to determine whether it is competitors. But there is no arguing with the money-spinning the only way to bring in cash. However, if Microsoft chooses to potential of such a scheme. One only has to look at Yahoo! itself to implement its own version of Adwords it would find itself on the appreciate this. horns of a dilemma. How could it reconcile such moves with the Prior to March 1 2006, Yahoo! had a similar approach to keyword lengths it has gone to raise awareness of IP rights – not to mention advertising as the one Google has now. At that point, it decided to the many statements from Microsoft’s chief executive Steve Ballmer restrict the service to ensure brands could not be hijacked. However, about the need to defend its own IP rights in the face of any perhaps it is no coincidence that since doing this, Yahoo’s US market infringements by the open source community? Could the man who share of online advertising revenue has fallen from 19.4% in 2005 to has consistently talked up the importance of respect for IP rights 15.5% in 2007, while Google’s share of the market has jumped from sanction a commercial strategy that many feel pays them scant 19.2% to 28.6% in the same period. regard? Brand owners and practitioners will be waiting and watching All of which raises some interesting questions for Microsoft with interest. WTR should its Yahoo! bid eventually succeed. Will the merged company decide to maintain Yahoo!’s current policy of respecting trademark Additional reporting by Sara-Jayne Adams, Intellectual Asset owners’ rights as it seeks to build its share of the online advertising Management magazine www.WorldTrademarkReview.com March/April 2008 World Trademark Review 39 Feature: Yahoo! acquisition: something to cheer about?

Brand valuation in M&As By David Haigh

The ‘buyer’s curse’ global software market. As the use of PCs has changed, Microsoft has Auctions generally work well for sellers because buyers can get diversified into internet service provision via its MSN sub-brand. carried away and over-pay. This is also a common feature of the But Google has moved more quickly into the internet space and M&A market. has become a dominant brand in search engine, remote software There are many reasons for over-payment, but the most and internet advertising applications. It is estimated that the common are strategic desperation, corporate machismo and the internet advertising business alone will be worth $80 billion a year siren call of the big brand name. Chief executives often strike deals by 2010. Google has a 56% share of this, compared with MSN’s 18% even though they make little commercial sense. This ‘buyer’s curse’ and Yahoo!’s 13%. explains why many contested takeover bids result in large To capture this prize, Microsoft has offered $44.6 billion dollars premiums, high borrowings and eventual goodwill write-downs. for Yahoo! equating to 6.4 times sales or 67.6 times profits. This may Academic studies have repeatedly found that acquisitions destroy seem relatively cheap compared with a smaller deal struck last year: shareholder value rather than creating it. Microsoft paid $6 billion for AQuantive Inc equating to 13.6 times Until 2004 it was hard to identify value-destroying deals sales or 111.2 times profits. because the difference between the price paid for an acquisition The fact is that Microsoft is desperate to win a higher share of and the fair value of the tangible assets acquired was put in the the internet market before it’s too late. Microsoft management balance sheet simply as ‘goodwill’. This asset was then amortized argues that Yahoo! is a struggling search engine brand and needs over a period of anywhere between 20 and 40 years, depending on strong financial backing to fight back against Google. Microsoft the whim of the chief financial officer. suggests that its brand can grow the combined revenues and cut $1 Then in 2004, International Financial Reporting Standard 3 billion of costs. This remains to be seen. (IFRS 3) was introduced with the objective of forcing management To understand Microsoft’s motives, it is important to understand to identify specific intangible assets acquired. This brought in that Google provides its users with remotely stored software and requirements for independent valuations to set the fair value of data applications, reducing the need for powerful, expensive PCs at individual intangible assets. The residual price paid must now be the user end. This represents a direct threat to Microsoft’s core referred to as ‘residual goodwill’ and excessive amounts can be business, which depends on the use of intelligent rather than dumb questioned. IFRS 3 also necessitates greater transparency and an terminals. annual ‘impairment review’ on each asset, including ‘goodwill’. The only way to determine whether a deal of this magnitude will Inevitably, management tries to avoid asset impairments, but the be value accretive or destructive is to conduct detailed brand due new rules make it much harder to do so. diligence and brand valuation.

Bull markets and TMT stocks Brand due diligence The most extreme examples of over-payment and excess ‘goodwill’ The key work streams for brand due diligence are as follows: arise in bull markets when deals are struck at inflated prices • Market mapping – understand the market in terms of size, trends, because buyers think asset prices can go in only one direction and channel structures and access, growth, margins and want to join in before it’s too late. segmentation. Understand the strength and momentum of all The technology, media and telecommunications (TMT) sector key competitors and what niches are covered by the target brand. has produced more than its fair share of such value-destroying • Customer and brand evaluation – understand who the deals. Good examples include the 2000 acquisition of customers are, what attributes appeal to them and their level of Mannesmann by Vodafone for $175 billion and the 2001 acquisition loyalty or preference to different brands in the marketplace. of TimeWarner by AOL for $124 billion; both resulted in multi- Understand the brand equities of the target brand and how it billion dollar ‘goodwill’ write-offs. Other examples include France will fit within the acquirer’s brand portfolio. Telecom’s acquisition of Orange and Hewlett Packard’s acquisition • Marketing capabilities audit – understand the quality of brand of Dell. management and other marketing resources required to build Such deals are usually ‘sold’ to the investment market on the and maintain the target brand. basis of revenue growth and cost synergies that subsequently turn • Financial valuation and analysis – understand the value chain out to be unrealistic. In all these examples neither revenues nor and profitability of the target brand and its probable effects on cost savings met expectations and ‘goodwill’ had to be written off. the wider brand portfolio. Understand how eliminating or merging brands will lead to uplift of key value drivers and hence Microsoft and Yahoo! greater financial value. Conduct ‘what if?’ analysis of how Is the recent bid by Microsoft for Yahoo! an example of this different brand architectures or marketing resources might tradition? create incremental value. Since Microsoft persuaded IBM to adopt Microsoft PC operating • Legal, financial reporting and tax reviews – understand the and application software back in the 1980s, it has dominated the strength of trademarks, domains, copyrights, designs and other

40 World Trademark Review March/April 2008 www.WorldTrademarkReview.com Share price index from 15/5/2006 to 15/2/2008 2.5 MSFT US Equity YHOO US Equity GOOG US Equity 2.0

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marketing IP ownership supporting the target brand. Understand value opinions required by IFRS 3 and the impairment reviews that the tax position. subsequently confirm carrying values in the balance sheet. In the case of Microsoft’s acquisition of Yahoo!, one would Brand valuation expect to see the pre-acquisition team conducting a brand due Brand valuations are most commonly conducted as a ‘discounted diligence and brand valuation exercise. This would be used for cash-flow’ analysis, which puts a capital value on the expected modelling the fair value price for the Yahoo! deal. Uplift scenarios future stream of revenues attributable to the subject brand. The key on both revenues and costs would be played through and it would elements in a brand valuation are: be the centrepiece for setting a maximum deal price. • forecast revenues by segment; However, other imperatives can intervene in this logical process. • forecast profits by segment; Rational answers flowing from the due diligence and valuation are • long-term market growth rates; often ignored in the heat of the deal. When this happens the • value driver analysis; detailed valuation model ends up as a monument to folly with the • brand strength analysis; epitaph: marry in haste, repent at leisure. Looking on the positive • brand contribution analysis; and side, the due diligence and valuation model can at least be dusted • brand risk analysis. down later for conducting the impairment review and ‘goodwill’ write down. These elements are combined in a financial model to provide a point-in-time valuation opinion. This method also creates a David Haigh is the chief executive of Brand Finance Plc in London framework for testing ‘what if?’ scenarios and is the basis for all fair- [email protected]

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