Yahoo! just launched the new Contacts API that allows developers great new ways to access billions of relationships in Yahoo! Address Book. The new Contacts API provides the same features as the Yahoo! Address Book API, plus it is part of Social API stack. Hence, it is fully compliant with the rest of the social APIs provided by Yahoo! such as Social Directory, Updates and the Status API. This allows you to mash up the APIs to create social applications for users on and off Yahoo!. To get started, visit the Contacts API documentation.

Original post written by me available here.

The most talked about news in the tech industry today is Microsoft’s unsolicited offer to acquire Yahoo! which was first publicly announced in January 08. This weekend, after a roller coaster ride of hopes and expectations, Microsoft announced to walk away from the deal causing Yahoo!’s stock to plummet over 15% on Monday. Having closely followed the deal since the beginning, I find it hard to resist talking about how the market dynamics lead one to make completely irrational decisions. I am not going to argue whether the company is worth $31 a share, as I do not intend to speculate. I will also not argue if Microsoft would be willing to pay more and what the true opportunity costs are for Microsoft to walk away from the deal. But what I will talk about is why I believe that the market, at large, is behaving irrationally regardless of what Yahoo!’s stock is worth.

Several Yahoo! stockholders argue that a sweetened offer of $33 per share would have been good enough for them and Jerry Yang and Co. should have willingly accepted the offer and not let Microsoft walk away from the deal. Some investors feel so strongly about this that they have openly expressed their frustration with the Yahoo! board. Contrary to the management’s belief, investors and the public in general really believe that company is not worth $31 per share. And they also believe that Microsoft will not be willing to pay more. This is where academia deviates from real life. The fundamental concept of asymmetric information between the insiders and the shareholders goes out of the door. An average investor on the street seems to think that he knows the company’s business better than the management itself. And guess who influences the average investor’s decision about a stock? – Wall Street analysts, media and stock pundits who every so often know nothing more than any intelligent investor, but have a big audience nevertheless.

Well before Microsoft walked away from the deal, an analyst from a leading Wall Street firm published a report stating that the probability of Microsoft walking away from the deal was 10%. This analyst (if you are savvy enough to follow the deal closely, you know who I am talking about) calculated the target stock price for Yahoo! by assigning % to all likely scenarios in the deal and taking a weighted average of the possible outcomes. To me, there is only one phrase that best describes this mechanism of computing a stock’s value – “Garbage In Garbage Out”. These are the people whose public opinions have a significant impact on the movements in the market, and what they do is speculation at best. At least that’s what they have done in this case. The analyst speculated that it is only 10% likely that Microsoft will walk away from the deal. As we all know, Microsoft did walk away this weekend. How credible are these analyst projections that claim to know where the market is heading? The market, at large, is heavily driven by sentiment. An average unsophisticated investor has little clue about what the company is truly worth. All that really matters is what everyone else thinks the company is worth. And since everyone else uses the same approach, the market is grossly vulnerable to “group think”.

What short-term investors fail to understand, or do not care, is that the biggest merger in the tech industry since AOL-Time Warner, if that counts, is easier said than done. Hypothetically, if the two companies merge today, it would no doubt create a very formidable competitor to Google. However, Yahoo! and Microsoft have entirely different cultures and merging the two entities will be a logistical nightmare. Both companies have so many overlapping properties – Mail, Messenger, Search, Finance, Personals, Sports, Autos, News, MSN – the list goes on and on. Yes, there are enormous synergies to be exploited, but due to the laser-sharp execution required, 2 plus 2 could very well equal 3 in this deal. It is difficult, if not impossible, for anyone but the management to know if a merger would truly create value for shareholders.

I believe the only rational investors in the market are long term value investors that invest in companies not because they believe that a stock which is at $10 at opening will be at $15 by noon, but because the companies fundamentally create shareholder value in the long run. Arbitragers do not have a clue what “value creation” is. Unfortunately for Yahoo! and Microsoft, a significant proportion of the stock is held by mindless arbitragers who do not care about long-term value. The large institutional investors holding stock in these companies that do understand “value creation” care more about their own pay day.

And the bottom line is this – the market seems to want a deal to happen regardless of long-term implications. A deal may or may not be a good thing for the two companies depending on how well the companies are integrated, but the market does not care less. The greed of the ruthless market has eclipsed all rational behavior.

 I recently attended a lecture in the UCLA Film and Television School about “Navigating the World of Narrative”. The speaker for the week was Bran Ferren, Co-chairman and Chief Creative Officer of Applied Minds. He is a designer and technologist working in entertainment, product development, engineering, architecture and the sciences. What impressed me the most about Bran was that he had a clear vision of the future of technology and the impact it would have on narrative and the way we communicate with each other. I walked out of the class knowing that I had witnessed a great speech by a true visionary and I remembered the comment he made about technology that really struck me the most.

The often misunderstood term in the modern dictionary is “technology”.  What exactly is technology? One definition is that it is anything that innovates or radically changes the way things are done in any walk of life – from art to science to commerce. Today, it is hard to imagine a life without the various technologies we currently use. But it is important to understand that a lot of the stuff that is second nature to us today was at some point “technology”. For instance, the wheel, which radically changed how humans moved around on the planet and was the genesis of our colonization of the planet, was unthinkable by the masses at some point in history. A more recent example is the internet that has fundamentally changed the way we think about a lot of things in our day to day lives. Go back 50 years in time and most of the things we do and the way we do them were unthinkable. Fast forward 50 years in future and you can imagine that we will be doing things that we do not even know today, using “technologies” that do not even exist today to solve problems that have not been created yet.

Another example is the television, which has now become one of the basic necessities of living. In the early twentieth century it was hard to imagine a device that would bring all the greatest content from around the world right in to our living room with a click of a button. But as we all know, that did happen and has been a quantum leap in the way we entertain ourselves. And this will happen again; over and over again. Because we, as humans, are wired to constantly change the way things work and make them better. The human desire to perpetually innovate is why we dominate the planet today. And the bottom line is this – technology is really a relative term. Tens of thousands of years ago growing crops, so you could feed on them, was technology because it was unheard of before. Today nanotech, artificial intelligence and the semantic web is “technology” as we have never heard of it before. So the next time you hear about an idea that sounds absurd because you think it has never been heard of before – think again! History does repeat itself.

Back in the game!