MSFT and YHOO: Then there were two

The bottom line: This is a move of desperation for both companies — a kind of shotgun wedding, with both sides holding a gun. Microsoft needs to buy Yahoo (or thinks it does) just as much as Yahoo needs to be bought by Microsoft. The happiest player in this particular game has to be Google: This deal means that it is dominating the market to the point where the world’s biggest personal software company and one of the founding fathers of the Web have been virtually compelled to join forces.

But can two sick dogs roped together beat one healthy dog?
Note: I did an audio slideshow for the Globe looking at Microsoft and its attempts to catch up with Google in the ad market. Here’s the link if you’re interested in listening to it.

Original post:

And then there were two. If Microsoft’s $44.6-billion (U.S.) bid for struggling Web giant Yahoo Inc. is successful — which it almost certainly will be — then there will be only two Web titans where once there was a triumvirate. Google and Microsoft will finally be going head-to-head for supremacy in the online advertising market, a game that Google has more or less controlled ever since it arrived on the scene several years ago, despite Microsoft and Yahoo’s best efforts.

Microsoft is rumoured to have made several advances to Yahoo over the past year and a half, and has been turned down each time. But now, the software behemoth is going directly to shareholders with an offer that has to look awfully good after the year Yahoo just had. Shares of the Web company have plummeted by more than 45 per cent in just the last three months, as investors have soured on the company’s chances of a rebound. Terry Semel was ousted as CEO because of a failure to deliver, and replaced by Yahoo co-founder Jerry Yang — a sentimental favourite with Yahoo fans, but a relatively unknown quantity from a management point of view.

The big question, of course, is whether this deal makes any sense or not. It clearly makes sense for Yahoo, since the company effectively gets a bye on having to come up with any kind of brilliant turnaround strategy — and shareholders, including co-founders Jerry Yang and David Filo, get a nice multibillion-dollar payday. Yahoo’s online advertising efforts haven’t had much success in growing the company’s market share, despite the fact that the company bought Overture, the firm that invented the keyword-ad market that Google later perfected. So why not sell?

For Microsoft, the question is a little murkier. Buying Yahoo has to look like a pretty sweet deal on the surface at least. Not only is the stock 60 per cent off what it was the last time Microsoft looked at buying it, but acquiring Yahoo gives the software company instant heft in its own online advertising business — a business that has continued to be a distant third in the market, despite Microsoft spending billions of dollars in an attempt to improve its position. Yahoo also has a number of attractive media properties and relationships such as Yahoo Music that Microsoft could fold into its own MSN assets.

At the same time, however, buying a company like Yahoo and trying to merge it with a gargantuan company like Microsoft is a time-consuming and expensive task — not to mention the difficulty of blending those two corporate cultures. Microsoft is a packaged software distributor at heart, while Yahoo is a Web company, and mixing those two approaches isn’t going to be easy. When Hewlett-Packard bought Compaq, it took several years for HP to actually digest the company. HP was lucky that by the time it was done, its main competitor had weakened to the point where it could get back in the game relatively easily. Google isn’t likely to give Microsoft that option.

Leave a Reply

Your email address will not be published. Required fields are marked *