Why Yahoo's going for the Facebook 'cashectomy' just now

Unless this is part of a bigger blood feud, the sides may very well decide to split the difference and cut a deal.

He may not always have had the greatest jokes to work with, but Jack Benny always had great timing. Scott Thompson, all of two months on the job, is giving notice that he, too, knows how to maximize the hand that he's been dealt as Yahoo's (relatively new) CEO.

In its everything-but-the-kitchen-sink lawsuit against Facebook, Yahoo claimed patent infringement on a range of technologies that it says were used without permission by the world's largest social network. In each of the 10 counts alleging wrong done by Facebook, Yahoo said it "will continue to suffer irreparable harm--for which there is no adequate remedy at law--from such unlawful infringing activities unless this court enjoins Facebook from further infringing activities."

The cynics--of which there is no shortage--will seize upon the lawsuit as Exhibit A to present this as a textbook case of a stumbling business entering its final throes having more interest in patent trolling than innovation. But for Thompson, who pledged in his first conference call as CEO that Yahoo would "be back to innovation" and "disruptive concepts," opportunity is knocking. And he's taking advantage of the moment.

Nearly two decades after former Lotus Development CEO Jim Manzi popularized the term during a famous software copyright brawl with against Borland International, it's time to dust off the term "cashectomy." What the lawsuit did not mention was that sometime very soon, Facebook will hold one of the biggest initial public offerings in memory. Facebook seeks to raise about $5 billion, give or take a few shekels, swelling the corporate bank account to the point where there's going to be enough in the till to buy pizzas for the staff well into the next millennium and beyond.

So what's a few hundred million---even a billion-dollars--to get Yahoo to drop its lawsuit?

"Facebook probably will have a pretty good chunk of cash [following the IPO]," said Clark S. Stone, a patent expert with the law firm of Haynes and Boone. "You've got to assume that unless it's some kind of grudge match with bad blood running, then there typically is some sort of business strategy behind this."

At this point, however, Facebook is not talking truce. Just the opposite, in fact. In a statement responding to the lawsuit, the social networking giant said that it would fight Yahoo's "puzzling actions." But patent attorneys will tell you that litigation often gets used as a business tool. For any mature company such as Yahoo, a company's patent portfolio is going to have enormous value--even more so when the company mentioned in the complaint actually is guilty of infringement. Not that the claims against Facebook have merit, but it's not uncommon for companies to split the difference and get on with more important things.

As noted earlier, this isn't the first time that Yahoo has mounted a legal attack against a hot, soon-to-be-public Internet company. In August 2004, Yahoo settled a patent dispute with Google over pay-per-click and bidding systems that give sites higher placement in Web results. The settlement came less than two weeks before Google went public. In that settlement, Google agreed to give Yahoo 2.7 million shares of its stock in a deal valued at the time as high as $290 million. Google also agreed to license several Yahoo patents.

Back to Facebook, Mark Zuckerberg may not want to settle. But with a huge payday ahead, he could always hold his nose and sign on the line which is dotted. In the end, a negotiated settlement won't make a whit of difference to Facebook's future. The irony is that it probably won't decide much about Yahoo's still-cloudy future either.

 

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