Microsoft/Yahoo: The Reasoning Is Sound

Will Microsoft pull the trigger on a long-rumored acquisition of Yahoo?

The New York Post thinks so. The Post is reporting that Microsoft is asking Yahoo to formally enter merger negotiations. Talks have been going on informally for years.

After being spurned by DoubleClick, Microsoft needs to beef up its online advertising and Yahoo would take care of two weaknesses: ads and search market share. If it made sense for Microsoft to buy DoubleClick, it really makes sense to buy Yahoo. The rub: A massive acquisition is out of character for Microsoft.

According to the Post:

While Microsoft and Yahoo have held informal deal talks over the years, sources say the latest approach signals an urgency on Microsoft's part that has up until now been lacking.

The new approach follows an offer Microsoft made to acquire Yahoo! a few months ago, sources said. But Yahoo! spurned the advances of the Redmond, Wash.-based software giant. Wall Street sources put a roughly $50 billion price tag on Yahoo. Goldman Sachs is apparently working with Microsoft, a fact that's no surprise since Goldie has been the investment banker of choice for Redmond since its IPO.

Now let's connect the dots on how this story developed. As Mary Jo Foley reported yesterday Microsoft is trying to transform into an advertising company. Meanwhile, Foley also noted that Yahoo Terry Semel is speaking at a Microsoft-run advertiser confab. Those dots are pretty easy to connect–both dots are the size of the moon. With those two items, all you have to do is regurgitate some old rumors, find a banker to speculate, toss in some background and poof you have a story.

Indeed, the arguments for a deal are pretty good. Yahoo's Panama ad system is the real deal and if company officials are to be believed–it's only going to get better. That fact indicates that Yahoo's price tag will only increase. Why not pay $50 billion today so you don't have to pay $70 billion later?

Meanwhile, Microsoft needs a way to close the search market share gap. Organic growth isn't going to cut it. By adding Yahoo and leaving it run mostly independent Microsoft has a shot of matching Google's share in the future. Today, it has no chance at all.

No one at Yahoo and Microsoft are commenting. Something tells me a lot of other folks will have something to say though. But let's not get carried away here–we've heard these things before.

Comments

[jbs:]

Yahoo and Microsoft are playing second fiddle to Google. We know this.

They are trailing because they are second-rate companies. Combining them doesn't make them better; it just combines the problems. I fail to see how the combined company would be better. Their problems are strategic and a merger would only complicate the issues they are both now tacking individually.

2007 May 04 10:46 PM

[Quaker:]

Bang! You nailed it. It stuns me how fast Google has moved past these companies. In the case of Microsoft, it's amazing that a company with this much money can be so unsuccessful at executing anything.

In fact, I think this "merger" is the last nail for Microsoft. Now that the gloves are off, All Google has to do is spend a half a billion to upgrade their free web based word processor and spreadsheet, and they can cut MSFT to peices.

It's no secret that Microsoft screwed up their dominance in the browser business (their browser is actually, unusable) and completely misunderstood that internet revenues would be in ads, not sales.

This merger is a pathetic last gasp, especially if they pay for it by printing more shares and hording cash. IMO, shareholders are going to take the stock to $ 20.

2007 May 05 09:34 AM

[Tom B:]

Let's be totally clear: MSFT has NEVER done a good job of executing ANYTHING. Even the Xbox has its failings, in that that division loses money and the box sounds like a vacuum cleaner. The only reason they exist is that they, for all intents and purposes, a State-sanctioned monopoly. And I don't think they can sustain that much longer. They are talking about dropping Windows to $3 a copy to get into the controversial "One Laptop Per Child" program-- and, frankly, at $3 per seat on Windows, I think I'd still prefer LINUX.

To put a finer point on it-- remember Hotmail? A well-regarded E-mail service, until MSFT bought it and dumbed it down to the point of uselessness. Monkey-boy Ballmer thinks he can mange the whole YHOO eco-system?

2007 May 07 08:38 AM

[Mr. Finance:]

MSFT – YHOO Deal Makes Sense Because Insiders Get Along
Microsoft and Yahoo have numerous common roots among the company’s board members and executives. The importance of common relationships between board members has been noted historically because most successfully negotiated mergers involve board members who have had past relationships with one another.

In Microsoft/Yahoo case, Orlando Ayala Lozano shares a board seat with Mr. Kern, who sits on the board of Yahoo. But, probably the most important relationship is between Charles H Noski and Roy Bostock, which possibly led the way for these discussions. Microsoft board member Charles H Noski and Yahoo board member Roy Bostock both sit on the board of Morgan Stanley – so most likely Morgan Stanley will play a role on this deal, were a deal to transpire.

If the merger takes place, executives from both firms have vast common connections, thus increasing the probability that these two firms will reach a common ground early into the merger, and personality friction should be minimal. Interactive URL (PC Internet Explorers Only): fn.intellectspace.com/...

Examples of executive synergies between the two firms include the following engagements that Microsoft’s executives have in common with engagements of Yahoo’s executives:

Harvard Business School (10 common relationships)
Stanford Business School (15 common relationships)
UC Berkeley (4 common relationships)
HP (3 common relationships)
Sprint (2 common relationships)
Global Crossing (2 common relationships)
Softbank (3 common relationships)
Ask Jeeves (3 common relationships)

Interactive IntellectSpace Knowledge Map (PC Internet Explorers only): fn.intellectspace.com/...

2007 May 05 04:58 AM

[alexbakertech:]

Microsoft's Earnings were absolutly STELLAR. They proved that they still make an absured (55million a day) amount of money---yet, their online section is the ultimate weakest link. Therefore, taking a very strong company and combining it with a strong company in the field of weakness makes complete sense.

Yes, Google is far superior and if MSFT and YHOO stay seperate it will forever remain that way. We have no idea what could happen if they combine.

Ya ya ya, two wrongs don't make a right. True. But, power + power DOES equal more power.

2007 May 05 08:31 PM

[Alan Williams:]

Every company Microsoft has gobbled up has slowly underperformed it's way into oblivion.

Yahoo will be no exception.

Microsoft will wish it still had that $50 billion in the bank in 3 or 4 years.

2007 May 05 09:35 PM

[Tom B:]

You are so exactly right right-on.

2007 May 07 08:43 AM