Microsoft, Yahoo! Merger Makes Sense

Henry “The Bull Turned Bear” Blodget has some commentary of Microsoft's (MSFT) online ad ambitions - coined as 10, 20, 30, 40 by division president Kevin Johnson:

• 10: Grow share of online pageviews from 6% now to 10%.
• 20: Boost share of minutes spent from 17% to 20%.
• 30: Grow share of search from 10% to 30% (dollars or queries? Not clear)
• 40: Grow share of advertising dollars from 6% to 40%

Blodget adds: “The first two goals are achievable. The second two are a pipe-dream–unless Microsoft buys Yahoo! (YHOO)…”

Now, take this with a grain of salt because I own YHOO shares - and they have been caught in a 22-33 range for what appears to be forever - but I am pretty darn sure that MSFT will sooner or later remake its image enough to seem like a good marriage partner for Yahoo.

Sure, Jerry Yang might not use MSFT products, but with age comes wisdom and common sense. Ultimately, YHOO has a great future if it realizes that it won’t catch Google (GOOG) in search. MSFT needs to realize that alone it won’t even catch up to Google either. However, together, they might not need catch up Google in search to become a far greater new media online advertising behemoth that would be far more complete, diversified and strong than Google.

You know what I mean by "MSFT might remake its image": shave its armpits and wax its legs (aQuantive), get a manicure and whatnot ($240M Facebook investment). It might even do some serious surgery (spin off Bungie Studios). But underneath the veneer, this remains the same MSFT at present time: a company that largely makes money on pretty much anything but online ads.

YHOO, however, is not really interested in marrying a software company, but as MSFT becomes more and more about the web and entertainment, then it becomes a better and better fit with YHOO.

Ultimately, if MSFT wants to get serious about web advertising, it needs to get serious about acquiring YHOO, which remains the only company that can help it get there.

After all, IAC (IACI) is not the solution, neither is AOL (TWX).

Search is important, display banner inventory is too, so is video inventory and mainly, having a network outside of one’s site. Only YHOO gives MSFT all of these things. I could go on and on, but YHOO music would be a shot in the arm of Zune; Yahoo! Movies and Games would be a perfect fit for the XBox franchise, too.

Mark my words, it might not happen because YHOO still thinks it has the potential to close in on Google, but that is lunacy. YHOO and MSFT are a far better fit than the purists would claim… and that remains a considerable opportunity.

Bagging the Catch

When Rupert Murdoch stunned Wall Street with a $5B offer for Dow Jones, he ensured that

• No one would get close to bidding for the venerable publisher of Wall Street Journal and Barron’s, and owner of Marketwatch.com
• DJ’s board and shareholders would not be able to refuse the offer.

Should Microsoft (MSFT) make a similar, open bid for Yahoo! (YHOO)? The MSFT/YHOO storyline is getting more and more ink as MSFT is openly calling to becoming a #2 in online ads.

Yahoo! is at $26, midway of its $22-33 range that its traded at for the past 12-18 months.That means $30-40B in market cap… so if MSFT openly made an offer for $50B through a mix of cash and stock, would Yahoo!’s board (who I believe has introduced a poison pill) really be able to say “thanks, but no thanks?”

After all, as a YHOO shareholder myself, I don’t see what YHOO plans to do to hit $50B in market value, frankly. I say that, even though I think YHOO is the best positioned online media company around. There is a disconnect between potential and reality right now.

As a web professional, I think YHOO + MSFT can actually work quite well when you consider how quickly technology and media are meshing and how much software and advertising are becoming intertwined.

As per culture? Give me a break! How many people at YHOO today were there in 1994? How many MSFT people are not products of the Web and don’t live, breath and sleep Internet?

I don’t know, but if YHOO’s board remain impartial to a merger or sale to MSFT, maybe MSFT should take a cue from Murdoch after all?

YHOO vs. MSFT 1-yr chart:

Comments

[David Lentz]

As a web professional, you should understand the difference between the Microsoft way of doing things and the Yahoo way. You should know that the tool sets and methodologies used to create the products are completely different, and that Microsoft ALWAYS pushes its assimilated companies to use the "corporate standard" tools and methods, and to melt and re-pour their products as the first order of business.

With Yahoo's Panama restructuring of their operation now (more or less) behind them, does it seem to you (as a web professional) that it would make sense to immediately re-do all that work upon being acquired by Microsoft? Because that is almost certainly what would transpire, and what has happened to every Microsoft acquisition.

And in doing this, taking the control and direction out of the hands of the assimilated companies, they have a very poor track record of successful preservation of whatever it was they acquired the companies for in the first place. Remember Hotmail?

And how about Bungie -- developer of Halo and Microsoft's crown jewel in it's computer gaming business sector? Wasn't one of the things that drove them to finally seek a separation from Microsoft the need to return to their own tools and do things their own way? Note that Microsoft was not the initiating party in the dissolution of their relationship with Bungie, as implied by your characterization of it as "spinning off Bungie Studios" -- it's more like Bungie Studios "broke free from Microsoft", as Bungie was the initiating entity of their separation.

People in the investment community tend to forget that there is something other than money involved in running a successful business.

As a "web professional", I don't suppose that there has ever been any business you have turned away from due to silly requirements like coding a web page delivery system in COBOL (or to choose something a bit less ridiculous, Ruby or Cocoa), or to implement it using Web Objects or WebSphere. You have a toolset that you tend to favor due to your own preferences and competencies.

Successful business mergers allow the acquired businesses to continue to operate using the tools and strategies that made them successful, and initially merge only at the strategic and financial levels. However, Microsoft does not now, nor has it ever, conducted its business in this manner.

Yes, looking at the strategic goals of Microsoft and Yahoo, it does make sense that they have a common direction and would work well together. But at Microsoft, "working well together" is not a part of the plan for acquired companies. Any independence of thought and action goes out the door when the ink is applied to the merger contracts.

When Microsoft changes its approach and tries to learn from its acquired businesses, perhaps we will see Microsoft begin to reclaim some of the lost glitter and glitz of its golden years. Otherwise we will see it continue to stagnate and decline in the face of competition that is blazing new trails rather than mining past glories.

People who look upon the strategic goals of two companies that do things in entirely different manners and think that a merger is just the ticket, since the companies' strategic goals are so well-aligned, often wind up seeing such mergers result in far less than the sum of the parts.

[Tom B]

This would be great for you-- you'd get a premium on your shares. It would be the end of Yahoo. It would be like Ford Motor Company taking over Amazon-- how could this POSSIBLY benefit either company?

[oceandude]

Couple things to note:

1. Zimbra would be in big trouble. Microsoft would certainly squash it, though they may not say it officially.

2. Microsoft's OS ego gets in the way. Would they allow themselves to absorb so many Linux and FreeBSD systems? I'm not sure they have taken their blinders off yet.

[ashkan karbasfrooshan]

Thomas - I've written so many articles blasting YHOO; investors would short the stock after reading those. My point is: if I write the odd article that suggests YHOO will always be an M&A target, please do not think it's got anything to do with owning shares. I'd argue I own shares because I think it will remain an M&A target, not the other way around!

David - I never said MSFT+YHOO is the optimal option for YHOO, I simply said this makes sense, the best pick is to go private (though with a more expensive interest rate this is less likely), gut the senior levels of management, reposition and spin off in an IPO in 3 years or so. That would almost triple the value but the bulk of the upside would not be at current investors' benefit, Thomas!

Frank - GOOG bought YouTube once it became clear Google Video had little traction... for example. So while I get your point, I think ultimately YHOO and MSFT might realize a merger makes sense because GOOG - whose shares I do NOT own - is running away with online ads...

[Tom B]

"I think ultimately YHOO and MSFT might realize a merger makes sense because GOOG - whose shares I do NOT own - is running away with online ads..."

It would be reminiscent of "Of Mice and Men", with MSFT playing Lennie. MSFT would squeeze all the life of Yahoo before it even realized anything was wrong.