Microhoo: Tech Megamergers Rarely Work Well

Microsoft has offered to buy Yahoo for $44.6 billion, a 62% premium over Yahoo's Thursday stock price. Microsoft has $20 billion or so in cash and, in 2007, brought in $17 billion in net income. This is a huge offer from a position of strength. It's reminiscent of IBM's 1995 takeover of Lotus Development. Yahoo won't have much luck resisting, and it's doubtful any other company could muster the money to outmaneuver Microsoft.

(In a little historical twist, top Microsoft exec Ray Ozzie was at Lotus when IBM bought the company. In fact, Ozzie was one of the main reasons IBM bought the company.)

Certainly Microsoft is doing this to battle Google, which has become a legitimate threat not just to Microsoft's non-core Internet businesses like MSN, but to its very core business of applications software such as Word, Exchange and Excel.

Microsoft + Yahoo equals...what? Well, Yahoo hasn't done so well the past couple of years, and Microsoft management and cash might help. Microsoft sure could use Yahoo's know-how in Internet services like mail and calendars and instant messaging -- none of which Microsoft has been able to dominate. One of the big things Microsoft gets in the deal is sheer infrastructure -- huge data centers that can serve Internet content and apps. That kind of stuff is underappreciated, but Google, Yahoo and Microsoft have been in a data center arms race. In that sense, Microsoft and Yahoo joining forces is like the U.S. and Russia becoming allies against Germany in WWII.

But caution is in order. Tech mega-mergers have rarely worked well. (H-P + Compaq? Nope. Compaq + Digital Equipment? Nope. AOL + Time Warner? Ummm...nope.) Yahoo is a unique culture. It flows out of the personalities of its founders, Jerry Yang (now CEO) and David Filo. Insiders had felt that ousted CEO Terry Semel had taken Yahoo too far from its roots, and were just getting enthusiastic about Yang's leadership and a return to its core culture. Now Microsoft comes along, and that can't be a positive for the culture. Hard to imagine Yang and Filo and other long-time Yahooians -- who've long made their fortunes -- sticking around after a Microsoft buyout.

All in all, this one's going to be interesting.

Comments

[User 86999:]

"... Hard to imagine Yang and Filo and other long-time Yahooians -- who've long made their fortunes -- sticking around ..."

Maybe it will be a good thing, if they don't stick around! The war of the cultures is obvious, but there will be a change of guards, so to speak, which will probably be better than what is out there now, however, I have a feeling that even msft and yhoo merger is not enough to beat goog. It will be interesting for an HBR case study.

2008 Feb 02 07:08 PM

[Tom B:]

The Yahoo techs will vote with their feet and will end up at GOOG or someplace. The MSFT drones that will replace them will be just as inept and useless at running the Yahoo portal as they have been about maintaining Windows.

2008 Feb 02 09:29 PM

[mkreisel:]

Imagine the nightmare migration of Yahoo's IT infrastructure from Linux to Windows!

2008 Feb 03 12:47 AM

[David Lentz:]

One has got to wonder exactly what Balmer thinks he's buying with hhis $44+B.

It does seem obvious that many of the people who make Yahoo unique and provide its best hope for the future will depart, and also that Microsoft has zero history of learning from its acquisitions, instead choosing to remake them in its own image and thus losing the very thing they bought the companies for in the first place (unless they bought them merely to eliminate competition, in which case $44.6B is an extreme overpayment).

The smart folks at Google must be celebrating tonight.

As for Steve Balmer, I think there's an old saying about a fool and his stockholder's money ...

2008 Feb 03 10:19 AM

[David H Dennis:]

Those who promote this merger do it with fizzy generalities. The truth is these companies have virtually no chance of working together successfully. If I were Ballmer, there's no way I would ever even think of contemplating doing such a crazy, cruel destructive act as taking over Yahoo.

I'd like to see antitrust considered. Microsoft and Yahoo overlap in a huge number of businesses and there's no question this is a highly anticompetitive move.

I'm normally very much against antitrust enforcement, but desperate times call for desperate measures :-(.

D

2008 Feb 03 02:05 PM

[TA:]

I'm not fond of this merger either but I guess they feel backed into a corner getting nowhere. Either way considering how much the EU hates MSFT, I can't see it going through.


I wish MSFT would just pay a proper dividend and stop hoarding cash so they can buy dying companies. They make $1B a month in free cash flow - give some of it to the shareholders instead!

2008 Feb 03 07:37 PM