Microsoft + Yahoo!: Here’s Hoping For A Better Option

February 1st, 2008

Now that I’ve had some time to digest the news and opinions of Microsoft making an offer to buy Yahoo!, here are some thoughts.

This is a brilliant move for Microsoft. This earnings season was pretty backwards - Microsoft did surprisingly well while many of tech leaders - most notably Google and Apple - took a beating. Yahoo! disappointed in a big way.

Rumors are emerging that Microsoft moved very quickly after Yahoo!’s weak earnings to make their desire known - but Yahoo! was not interested. Kara Swisher claims that as a counter-move, Microsoft then threatened to go public with the offer - and actually did.

The result is bad for Yahoo!. Shareholders may now force Yahoo! to pair up with Microsoft even if management doesn’t want to. And if Yahoo! refuses Microsoft, it may now be expected that they sell to someone. Going it alone (the former status quo) is a third option that if taken - the stock will certainly tank.

So it sucks to be Yahoo! management right now, where options from last week are now obliterated. This may be why Semel resigned from the board this week.

Anyhow, back to the pros and cons of the merger. Is there anything positive about it? On paper, yes.

  • Yahoo! would have access to hardware and software like never before - imagine Yahoo! built into Internet Explorer or Yahoo! Music on the Zune.
  • Yahoo! would have an in with Facebook.
  • A really huge online ad network.
  • The combined company could take on Google.

But I have a longer list of downsides:

  • The likely product synergies are uninspiring. Yahoo! Music on the Zune? Uh… still not buying one.
  • If Microsoft is currently suffering from lack of vision and corporate bureaucracy, this merger doesn’t solve that. Yahoo! management doesn’t have much, either.
  • Integration of overlapping properties will be a nightmare.
  • Yahoo! has made some decent Web 2.0 acquisitions, namely Delicious and Flickr. But based on past history, I can fully imagine Microsoft deciding to “monetize” these refreshingly open services in bone-headed ways, like ads or default options for all other Microsoft services.
  • At worst, it could create a huge, unwieldy albatross like AOL / Time Warner.

In conclusion:

Will this merger happen? I’ll say: probably. Yahoo! management is surely in turmoil right now, trying to save the company. It must be tempting to just hand the mess over to someone else and get paid for it. It’s the easy way out.

But this way out is fraught with danger for the employees and ultimately us users. Despite talk of Microsoft preparing retention packages, I would take the more cynical view. Whenever there is a merger of this size I’m sure the suits will take the knives out and start slashing “redundancies.” - especially if one of the goals Microsoft laid out was to realize “operational efficiencies through elimination of redundant cost.” And ultimately, as a user, I fail to see how this will improve the few Yahoo! and Microsoft products I do use.

So I’m personally troubled this situation. I’ll be sad if the former Internet leader is sold to big, bad Microsoft. Especially when it doesn’t seem to be happening in a manner Yahoo! would like.

Perhaps Yahoo! has other options:

  1. Merger with eBay?
  2. Private equity?
  3. Google? Perhaps instead of an acquisition, Yahoo! will kill their ad network and partner with Google - and maybe give Google a minority stake in the company. This idea was mentioned earlier this week by Mike Arrington. Paul Kedrosky also muses on this idea.

Call me sentimental, but I’m hoping for option three.

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  • Mike
    Me too. I'm dumping the few Yahoo services I do use, particularly the Web 2.0 ones, if they're bought out by Microsoft. I weathered Hotmail for way too long after their acquisition, and I won't be burned again like that.

    I'd rather go back to building my own photo album, for example...I hope open source web galleries have improved in the past couple of years.

    And, of course, as a geek it's disheartening to see Yahoo! die in the worst possible way. A slow death at Microsoft. I hope Google is considering doing something - even a smaller bid from Google would be better for Yahoo! as a whole than a larger bid from Microsoft.
  • Yeah - I don't see how adding Microsoft to Yahoo! will get me to switch from my Google and Apple apps. And for a photo album, there's picasa, Apple web galleries, and SmugMug :)
  • How about option 4 - not to merge at all? Anyway Microsoft+Yahoo=bad news for everyone
  • @webomatik, the no-merger scenario would be possible if there was a significant deal (a la partnering with Google) or some other bold moves from management. Unfortunately, the Street has been waiting quite some time for a bold move OR some signs of success from one of Yahoo's strategic projects. Since they haven't succeeded on that front, they've pretty much painted themselves into this corner.

    Having worked at Yahoo (98-02), I'm not particularly happy about this flameout. This will be one of those legendary textbook cases in the future -- how the market leader "lost" the web. But it seems to me that, were I a shareholder or even a non-founding executive, the MSFT terms look really attractive.

    The rumors of a FOX counter-offer are intriguing. And of course, Ebay-Yahoo (a combo that almost came to pass back in the late 90s on no less then 2 occasions) is also still in play.

    There's no way Google could acquire Yahoo. I think the anti-trust issues would be too high of a hurdle to overcome (in the areas of search and advertising). I do think the idea of a Google partnership is really interesting, though that seems like more of a win for Google than Yahoo. Again, if I'm a shareholder, a Google ad-deal for Yahoo might signal increased operating efficiencies and short/mid-term optimization of profits (when coupled with major layoffs, corporate restructuring and stragetic refocusing), but it doesn't really do much for me wrt long-term valuation given the short-term option offered up by Ballmer & Co.

    I do feel sorry for the founders, Jerry Yang and David Filo. I'm sure this isn't the way they wanted to play things out. And I'm sure they're probably pissed about the misfires and missed opportunities. Of course, financially they're all fine :-)

    Integration of these two operations will be a huge headache. So many overlapping web properties. How that gets sorted out is anyone's guess. But you can imagine that Google must be loving this. It's exactly the type of competitive distraction that will give them extra time to gobble up more market share and extend that almost insurmountable lead.
  • hey Dave... yeah Yahoo! definitely did the corner-painting - possibly way back when Semel took over and had visions of creating a Hollywood style content company. Google helped box them in and Microsoft is just coming along, putting the final strokes on the corner.

    As for integration - you probably know more about this since you worked there - but I guess Yahoo! back end is run on open source stuff, one wonders if MSFT would make them port everything over to Microsoft equivalents. That sounds like a bitch...

    Yeah I don't think Google can buy Yahoo! either which is why this partnership seems like an interesting work-around. But the key question is why would Google do this - it'd be like they're buying Yahoo! out of pity. They can just do nothing and let Yahoo! fade away or let MSFT blow tons of money on Yahoo!. Either way, like you say, they'll just keep pulling ahead.

    And I definitely share your sentimental feelings. I still remember "back in the day" (which was only 10 years ago) when I moved to SV and Yahoo! was $100 a share - like the Google of 1998 :)
  • Mike
    Google and Yahoo! would work so well together...we could witness so many services combine, and as they're all based from similar code - the integration could happen rather quickly.

    Yahoo! News : Google News
    Delicious : Google Bookmark Sharing? (at least, I thought Google had something similar)
    Flickr : Picasa
    Yahoo! Search : Google Search
    Yahoo! Mail : GMail

    There are so many more examples...I think combining each service, or ditching one for the other, would really make Google and more diverse and and interesting company. Yahoo! could then be regulated as a brand name, just as Pixar is still a recognized name even while being owned by Disney.

    Thanks for the Flickr alternatives...if the Microsoft deal goes through, I might just nuke my whole Flickr account and go back to using iPhoto exclusively. That, and re-import my Delicious bookmarks into Safari. The internet will be a much more boring place, as these sites suffer a massive exodus from their most prolific users...what good are Flickr's APIs if there are no more compelling pictures being uploaded?

    Besides Flickr and Delicious though, there's nothing that Yahoo! owns that I'd actually use myself anymore, which probably says something (and I started using both before Yahoo! acquired each).
  • One final comment on this --

    The tragic thing here is that in any other set of circumstances, the creation and sale of a 45 billion dollar company in the span of 13 years would be a wildly amazing and legendary American business success story. The fact that in this case the whole transaction smacks of failure is a testament to how insanely high the expectations and opportunity for Yahoo were -- that Yahoo should be sitting where Google is now. It's just mind-blowing when you think about it.
  • I would also like for Yahoo to stay independent and not merge with anyone but it seems unlikely that this will go down that route. :(
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