My first reaction when I heard the buzz about the deal was that there hasn’t been this much fuss about a potential merger since AOL acquired Time Warner for $182 billion back in 2001. Certainly, there hasn’t been another Internet deal that big since then. It would be the biggest deal in Microsoft’s history, dwarfing the previous record-holding $6 billion purchase of aQuantive.
That’s all the more reason we should take a close look at this deal. You know every Yahooligan is doing so. Some of them are shuddering. Others, according to a comment on a Valley Wag story, are vowing to stay and work to make any cultural changes to the organization “as painful as possible for the new Microsoft directors and division Veeps, short of insurrection.” I’ll have more on that point of view in a bit.
If you have to ask why Microsoft is doing this, though, you haven’t been paying attention to the search arena since Google entered it. In a press release on its web site, Microsoft notes that “The online advertising market is growing at a very fast pace, from over $40 billion in 2007 to nearly $80 billion by 2010…Today this market is increasingly dominated by one player.” That one player is Google, which by some estimates garners two-thirds of search traffic, leaving Yahoo and Microsoft with a combined paltry 28 percent of the market.
Microsoft clearly wants a piece of that pie, and its own efforts haven’t enabled it to secure the space. So it is turning to the embattled veteran in the field, hoping to capture that magic and develop some synergies that will help it defeat big bad Google. Anybody who automatically thinks a deal this big, between two companies so different, will give you great synergies didn’t learn any lessons from the AOL-Time Warner merger I mentioned earlier. The most polite word I’ve heard to refer to that deal recently was “disaster.” And it was trumpeted at the time as the creation of a major media powerhouse combining old and new. Will “Microhoo” or “Yacrosoft” be any different?
In a letter to Yahoo’s board of directors specifically sent to the attention of its chairman (Roy Bostock) and CEO (Jerry Yang), Microsoft CEO Steve Ballmer lists four key synergies he sees as coming out of the deal. These include:
- Economies of scale related to the advertising platform. These include synergies across both search and non-search related advertising (Yahoo is a leader in banner advertising).
- Expanded capacity for research and development, thanks to the combined talent of Yahoo’s and Microsoft’s “engineering resources.” With a focus on a single search index and single advertising platform (instead of two separate ones at two separate companies), Microsoft anticipates many breakthroughs post-merger that would be “a function of an engineering scale that today neither of our companies has on its own.”
- Operational efficiencies, which Microsoft sees the combined entity gaining as a result of “eliminating redundant infrastructure and duplicative operating costs.”
- Improvements in emerging user experiences, specifically from applying those aforementioned engineering resources to video, mobile services, online commerce, social media, and social platforms.
Yahoo’s shareholders also stand to benefit from the deal. Microsoft is offering $31 per share in a combined half-stock, half-cash transaction. That’s a 62 percent premium over Thursday’s $19 close. But that’s now; let us not forget that Yahoo was trading at $34.08 per share as recently as late October. Even so, Saul Hansell of the New York Times thinks this is an offer Yahoo can’t refuse – and he’s hardly alone in his opinion.
Microsoft’s search and Internet operations, as Hansell points out, aren’t gaining a foothold in the marketplace. Yahoo has the audience and the know-how to run those properties. It may be second to Google in search, but it is still the most-frequently-visited destination on the Internet, with a monthly audience of 500 million.
So what could Yahoo get out of a merger with Microsoft? Well, there’s Microsoft’s general investment (monetary and otherwise) and technical expertise. Just before the Microsoft offer was made public, Brian McAdams, now head of Microsoft’s Advertiser and Publisher Solutions Group and formerly CEO of aQuantive, spoke glowingly of how “our integration efforts are paying off.” Yahoo would no longer be alone in its fight against the Google juggernaut. But what will it have to give up in return?
Some think Yahoo may have to give up its very soul if it chooses to merge with Microsoft. Jerry Yang’s hatred of Microsoft products reaches legendary proportions; supposedly he will do just about anything to avoid using them. But the cultural differences run even deeper, as I’ve already hinted.
When Yahoo was born, Microsoft had already been in existence for 25 years and become a software powerhouse. Yahoo prospered in the early days of the Internet, developing a free-wheeling, laid-back, idea-intense culture long before Google came on the scene. Microsoft is widely perceived as having a buttoned-down, corporate attitude; just look at Apple’s “I’m a PC and I’m a Mac” commercials to see this in action.
Yahoo was rather low-key in its response to the deal, saying that its board “will evaluate this proposal carefully and promptly in the context of Yahoo’s strategic plans, and pursue the best course of action to maximize long-term value for shareholders.” Some analysts seem to think that Yahoo is now scrambling for other offers (more on that in a bit). The company put Microsoft off for at least a year; some think this was because of Terry Semel, former CEO of Yahoo. Now that he has left Yahoo completely, Yahoo may be running out of delaying tactics.
And Microsoft is, potentially at least, a ruthless player. Most analysts have quoted extensively from Ballmer’s letter to Yahoo. Few noted that the software giant gave Yahoo only two days to prepare some kind of response before going public with the letter. And even fewer noted this tantalizing line from the letter: “Depending on the nature of your response, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo!’s shareholders are provided with the opportunity to realize the value inherent in our proposal.” Could this be a veiled warning that an unfavorable response may lead to Microsoft starting a hostile takeover bid for Yahoo?
If so, and it comes down to a fight, Microsoft might have a real battle on its hands. Anders Bylund, wrting for Ars Technica, noted back in mid-January that “Shareholders and board members get a serious say in any takeover offer here. Yahoo has an active poison pill provision that would let the board issue tons of additional preferred stock in case of an unapproved buyout proposal.” So Yahoo could at least make it hurt Microsoft to take them over, if they wanted to. Will Yahoo resist the bid?
Most analysts seem to believe that no one else will match, let alone beat, Microsoft’s bid for Yahoo. For example, Tim Smalls, head of US stock trading at brokerage firm Execution LLC, said that “To me, the premium seems exorbitant, for what is a dwindling business.” So why pay more for it?
Besides, there are very few players who might be interested in Yahoo who could beat Microsoft’s bid. One of them is Google, of course, but Google isn’t going to make an offer. It’s having enough trouble convincing the EU antitrust regulators to let its purchase of DoubleClick go through. An attempt to buy Yahoo would likely put them in trouble with US antitrust regulators.
Still, some report that there may be other bidders waiting to enter the game. Henry Blodgett cites sources as saying a private equity firm might be interested, specifically Quadrangle Partners. This New York-based firm gained a brand new employee with close ties to Jerry Yang – former Yahoo president Dan Rosensweig. If Yang is looking for a way out of this bid, this could be an option.
Quadrangle might not be Yahoo’s only option, either. TechCrunch claims that News Corp., owner of MySpace, is trying to put together the money for a bid on Yahoo as well. Whether they’ll be successful in their bid remains to be seen.
Whether the Microsoft bid will succeed really comes down to one question: can Jerry Yang and Susan Decker convince Yahoo’s stockholders that they can turn the company around in a reasonable amount of time? Bylund thinks that “If Yang can hook the world’s biggest traffic generator up to some new revenue-generating machinery, all will be well. Microsoft buying the company at this juncture would put a crimp in Yang’s authority and autonomy, and would rob shareholders of potentially massive gains if Yahoo becomes all that it can be.” But this will be a hard sell to shareholders who have watched their stock plummet for far too long, and are desperate for some kind of change for the better – even if they have to sell what’s left of Yahoo’s free-wheeling soul to bring it about.