Microsoft and Yahoo: Mergers and Other Options - The Numbers Game
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The Wall Street Journal article featured an excellent chart that compared various aspects of Microsoft, Yahoo, and Google. I can't reproduce the chart here, of course, but it does a good job of showing why Microsoft feels threatened by Google, and why the software giant may think purchasing Yahoo makes sense. It doesn't all boil down to numbers of course; the Post cited one banking source as saying that Microsoft was "getting tired of being left at the altar." But it's a good place to start.
The first thing you notice is that Google's market value is only half of Microsoft's. But Google is accomplishing this with less than twenty percent as many employees as Microsoft. There's also Google's rate of growth to consider. It took Microsoft more than thirty years to achieve its current size and market value. Google achieved its size and market value in less than ten. So not only is it already a significant fraction of Microsoft's size, it's growing faster with fewer employees, making it a lot more nimble. In another ten years or less it could overtake Microsoft completely in market value.
Microsoft must see this. While it's true that executives at large bureaucratic companies aren't always renowned for their skill in taking the long view, Microsoft has an example from its own history to remind them what happens when a larger company is blindsided by a nimbler, more technologically savvy competitor. Back then, Microsoft was the nimble competitor, and the larger company was IBM.
The vast majority of Microsoft's resources and revenue are still tied up in its operating system and software. In fact, in 2006 only about five percent of its revenue came from online ads. Compare that with Yahoo and Google, who made two thirds and 70 percent (respectively) of their 2006 revenue from online ads. When you combine the numbers with Microsoft's attempt to buy DoubleClick, what you see is a tech giant belatedly realizing how badly it needs to get into a new technology field, but not being sure how to do so effectively -- and not being as motivated as it has needed to be up to now because its revenue from other areas has been insulating it. That sounds very suspiciously like the IBM of Microsoft's past.
What kinds of numbers would emerge if Microsoft purchased Yahoo? The two companies' combined online ad revenue for 2006 is close to $7 billion, which compares favorably with Google's $7.3 billion in online ad revenue for the same period. The two companies' combined share of the search advertising market would reach 27 percent; that's still not wonderful against Google's 65 percent, but it's better than either of them have been able to achieve alone.
Looking past the numbers for a moment, the Post mentioned some ways in which the two companies complement each other -- the differing demographics the two companies draw with their content offerings, the possibility of using Yahoo content on Microsoft devices, and so on. In short, despite the fact that it would be by far the largest purchase Microsoft ever made, a buyout of Yahoo would make a certain amount of sense for the software giant. "I can't imagine a more perfect deal," notes Peter Lobravico, vice president of risk arbitrage sales/trading at brokerage Wall Street Access.
Next: Is a Buyout Necessary? >>
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