TrustStix Blog

There was a good post on “How much leverage does Yahoo really have? Ask Overture“.  This got me into thinking, can Microsoft really afford to loose unlike Yahoo which could walk away from Overture deal long time ago.

It is my belief that Microsoft cannot afford to loose this unsolicited offer for Yahoo.  This is because of positioning and signalling that they did when they made this offer in the first place - “we will be better positioned to compete with Google”.  Infact, I like the internal memo statement that Steve Ballmer made to his employees stating just the positives of the merger and nothing to do with Google.

Now that Yahoo has formally rejected the bid, things have become more interesting.  I had a chance to listen to major Y! stock holders on CNBC - all of them support this acquisition - simple reason, they have all bought Y! stock at prices less than $20 and with this, they will have a substantial gain.  They really don’t care about synergy or things in the long term - their concern is $$ now - which is how they are judged on.  There is nothing wrong with their thought process though from an investment point of view.

But, I am inclined to look at this deal from a MSFT point of view - why pay so much when you will not be able to even pose a greater threat to Google or any of the online offerings and get into more Anti-Trust issues.  Is there a feeling in the MSFT camp that the stock is going to trade higher with a favorable P/E given that they would have more online offerings?  The acquisition for MSFT will easily give them at least $3Billion per quarter in revenue (top line) immediately, but, over a period of time, will the growth be healthy?  With some good wins on Windows Mobile Operating System and XBox360 Live, they could try and bundle some offerings - but, will they be hit with Anti-Trust issues?

It seems like everyone has a opinion on Microsoft’s unsolicited bid for Yahoo.  Here are my 2 cents.

Why this deal may not work for both Microsoft and Yahoo?

1. Both have properties that are in the same area (mail, ad networks, etc) and the sum of these may be less than the current value of the better of these two.  It eats away advertising revenue - I will have one less email account which translates to less ads and hence revenue.  Yahoo has around 350 million accounts and Microsoft has around 100 million accounts.  With the merger, I can merge both the accounts and finally, the net effect is not 450 million accounts, but, around 350 million.  There will also be attrition of users.
2. Yahoo will now get into more serious Anti-Trust issues if it becomes part of Microsoft.  This will slow both Yahoo and hence Microsoft.  Microsoft process itself is slow, now innovation will be further slowed.
3. There is no track record of Microsoft buying any big company and integrating it.  It took Cisco so many acqusitions and screw ups to get an understanding of how to make acquisitions work to some level.
4. Microsoft is still Remond, WA centric.  There are too many fundamentalists in the company who just want to do it the Microsoft way.  This will certainly cause a clash of cultures and this will certainly add to attrition.
5. It is possible that many Yahoo employees will sell stock and move on to possibly form new startups - so there will be more money in the Valley.  But, this means that products within Yahoo will be abandonded or delayed or it will have more issues.
6. I can’t even think of moving Unix systems, PHP, MySQL, etc code to Windows - which is what Microsoft will want to do after some time.  This will certainly cause problems.  I don’t think even keeping Yahoo autonomus will help.
7. There will be more pressure internally with in Microsoft to build features into Windows to include Y! stuff - this will be a biggest problem especially related to Anti-Trust issues.  So, documenting more client-server protocols will be more fun
8. Managing all the business contracts with both Y! and Microsoft is going to even tricky.  Assume that if I have relationship with both Microsoft and Yahoo for content or advertising, etc., and with this merger there is only one portal, businesses will renegotiate to a lesser dollar value for many of the above reasons.  Microsoft certainly has a large enough vault to burn more ca$h and not get impacted.  But, will this really help inovation or better user experience or compete better with Google - I personally don’t think so.

Is there a way for Yahoo! to survive without going thro’ this sale?

1. I certainly believe so.  One thing wall street has constantly complained against Yahoo is Search.  In this day of Service Oriented Architecture (SOA) and Web Services, outsource Search to Google, collect ad revenue and concentrate on keeping the 350 million users on Yahoo portal.  It does not matter if Google is serving ads to Yahoo - retaining customer on the portal is its core competency for Yahoo.  This move should certainly help Yahoo financially, focus better, keep Wall Street at bay for some time and more importantly give it breathing room in terms of time to build better services.
2. I don’t buy into the fact that ATT, GE or others are possible suitors.  Nobody wants to go over AOL/Time Warner 2.0.

We have all learnt that the devil is always in the details.  I have a feeling that not much due-deligence has been done on what it really means for this acquisition to happen even for a reasonable success.

Starups will have one less exit   Getting acquired by Microsoft is lot harder to put it mildly.

Mini Microsoft is a site where you get lots of Microsoft insider posts.  Interesting read - http://minimsft.blogspot.com/