Microsoft, Yahoo: It Will Take More Than a Merger to Compete With Google

The rumor that Microsoft (MSFT) intended to buy Yahoo (YHOO) for an estimated $50 billion had investors clamoring for Yahoo shares on Friday. Recently, we understand, Microsoft had approached Yahoo with an interest in buying the company as well. At that time Yahoo apparently shunned the deal, but because there was a past interest the current rumor didn't seem that far fetched or unreasonable by Wall Street standards. Investors hoped for the best, and Yahoo shares surged on Friday. The question now is: is there a deal on the table or not?

Yahoo and Microsoft are clearly competing with Google (GOOG) in the lucrative online search space. Interestingly though, even the combined company of Microsoft and Yahoo would not reach the same size as Google in this particular space. In addition, a deal between Microsoft and Yahoo would not give the combined company the necessary edge to compete with Google either. Sure, the combined company would be much closer to the size of Google, but the prospects for growth of this combined company would not be any different than they are now.

We should be thankful that Yahoo was unsuccessful at buying Google pre-IPO, or when Google was serving Yahoo search engines, otherwise we may never have seen the lucrative possibilities of the online search space.

Let's compare the companies, and let's define that edge. First of all, the corporate ideology of Google is to embrace its employees. The employees at Google come first, the work environment is fun, the employees enjoy working there, and the philosophy is that those employees will be loyal and they will achieve to be the best at their respective professions because of it. The end result is a work environment that is better than any other. Therefore, Google is attracting young, fresh talent with innovative ideas and strong work ethics all the time.

Yahoo and Microsoft are top-tier companies, so logically they attract talent too, but they have also retained many older seasoned professionals at executive levels who still have the older corporate ideology of the http://www.rusadult.com/dot com era built into them. The end result is that Yahoo and Microsoft have a much more difficult time finding new and innovative ideas.

In fact, stemming from the dot com days, Yahoo and Microsoft have a corporate shell that is virtually impenetrable. In the past there was a wealth of internal innovative ideas coming from within; their internal ideas were better than others, so they did not need to look outside the company. But the playing field has changed; they need new ideas to compete with Google. Unfortunately, approaching Microsoft or Yahoo with an innovative idea is virtually impossible, and most of the young fresh talent is being attracted by Google.

Google does not have the same corporate shell. Google opens its arms to new ideas. Google is a sieve of new ideas and a host of lucrative opportunity. That's what keeps the company growing at the rate at which it's growing.

In order for Yahoo and Microsoft to grow at the same rate as Google those companies must lift their corporate shell. A merger of these companies will not suffice. Unless Yahoo and Microsoft are able to change their corporate philosophy these companies will not attract the talent needed to grow at Google like rates, they will not find fresh ideas, their efficiency will remain slow, and their stock price will reflect that.

In addition, an outright acquisition of Yahoo by Microsoft doesn't seem like much of an added value anyway. Buying Yahoo here is analogous to buying Yahoo in November of 2000. In November of 2000 Yahoo's price was in the high 20s - low 30s. The price earnings multiple for Yahoo was about 50 times earnings, and the growth rate was slowing. Currently, Yahoo is trading in the high 20s to low 30s like it was in November of 2000, its price earnings multiple is in the high 50s, and in the last quarter the company reported a negative growth rate. This is very similar to November of 2000. In addition, after November of 2000 Yahoo's stock declined to near $4.

Clearly Yahoo would benefit by an acquisition from Microsoft. However, Microsoft would not benefit from an acquisition of Yahoo. In fact, if Microsoft indeed buys Yahoo the result will be a negative for Microsoft well into the future. My recommendation: don't do it!

A joint venture however could be a benefit to both companies, and I would support that more than a takeover.

Microsoft and Yahoo need much more than each other to compete with Google. They need to lift their corporate shell. Anything less will not suffice.

Keep up the good work Google.