Why Did Microsoft Yell Yahoo, Today?
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News Analysis. They say timing is everything. |
[Editor's Note: Microsoft's proposed Yahoo acquisition is so big that it could be a month of topics. The analysis of this unprecedented, unsolicited merger bid will be broken into shorter posts rather than the more typical single encompassing one.]
My first reaction to Microsoft's proposed $44.6 billion bid for Yahoo is "Why now?"—as in today. Nobody announces a big merger, particularly an unsolicited one, on a Friday. What's up with Microsoft's timing?
The question isn't trivial. Microsoft has been looking at a possible Yahoo merger for about 18 months. In May, during the last round of big Yahoo acquisition rumors, I explained some of the reasons why a merger would make sense. Reasons for announcing today:
Microsoft financial logistics. The announcement had to come no later than today, or not any time soon. More typically, a public company would make this kind of announcement on a Monday, or otherwise early in a week, because of stock markets. However, Microsoft CEO Steve Ballmer and Chief Financial Officer Chris Liddell are scheduled to offer their semiannual Microsoft report to financial analysts on Monday in New York. Microsoft wouldn't want to make this big a financial announcement on the same day as that meeting.
By announcing the bid today, Microsoft already has set some of the agenda for Monday's important meeting, giving financial analysts the weekend to number-crunch the deal and prepare questions for Ballmer and Liddell. Monday's meeting should be the most exciting midyear report that Microsoft has had in years.
Yahoo shutterings and firings. A merger bid could forestall intended Yahoo pink slips and service closures. Some of the people and products that burden Yahoo's bottom line will be valuable assets to Microsoft. As I will explain more fully in a subsequent post, Yahoo is more a media company than either Google or Microsoft. Yahoo's character is actually closer to AOL than either of its two major competitors'.
Those media assets are hugely valuable to largely contentless Microsoft. Company executives would want to make the decisions on what or what not to keep. Yahoo could gut itself, leaving behind a much less valuable acquisition. An unsolicited bid now could keep Yahoo largely intact.
Yahoo vulnerabilities. The company is in crisis. There are earnings and growth concerns, and the share price is low enough that Microsoft could make a premium bid without breaking the bank. By announcing today, Microsoft has put tremendous pressure on Yahoo's board to respond before the stock market opens on Monday.
The bid is strategic in another way. If Yahoo's board rejects the offer, shareholder reaction could get ugly, driving down Yahoo's stock price and creating greater uncertainty about the company's future. Microsoft cannot snatch search market share from Google. It simply won't happen at this time. Microsoft has got to go over or through No. 2-ranked Yahoo. The acquisition would be the way through Yahoo. Otherwise, Microsoft climbs over the dying Yahoo or its carcass. The timing is win-win for Microsoft, no matter how Yahoo responds.
Microsoft is better positioned to capitalize on Yahoo's weaknesses than Google is. Microsoft's advertising and search strategy is increasingly multichannel, more so than Google's. Microsoft could capture business from Yahoo in ways Google isn't as well prepared to.
Google vulnerabilities. Yesterday's Google earnings disappointed Wall Street and raised, perhaps for the first time, questions about whether the golden child has lost some of its magic touch. In that context, Microsoft's bid, the day after Google missed the Street, can create all kinds of FUD (fear, uncertainty and doubt) about the future.
More importantly, the bid's timing is like a magnifying glass into Google's shortcomings. Google is really a two-trick pony—advertising and search. Google's revenue is almost all advertising, and the company largely makes money on stuff it doesn't produce. Microsoft's Yahoo bid is cause to look more closely at the long-term viability of Google's business model.
By contrast, a combined Microsoft-Yahoo would have lots of tangible assets, such as software, as a foundation for a extending advertising more places. Additionally, Microsoft and Yahoo either both produce content or license it from others. Google's business is more about wrapping contextual search or advertising around other people's content, using without asking permission.
Related:
- Microsoft-Yahoo Is a Developer Services Boost, eWEEK, Feb. 1, 2008
- Yahoo Is Microsoft's Last Web Stand, eWEEK, Feb. 1, 2008
- Ballmer's 'Moody' Yahoo Pitch, eWEEK, Feb. 1, 2008
- Microsoft Deal to Cancel Yahoo Pink Slips?, eWEEK, Feb. 1, 2008
- Microsoft! Buys! Yahoo!, Eric Lundquist Upfront, Feb. 1, 2008
- Break Down the Garden Walls, Masked Intentions, Feb. 1, 2008
- Blodget Bludgeons Windows Live to Death, Microsoft Watch, Oct. 8, 2007
- Will Microsoft Yell Yahoo?, Microsoft Watch, May 4, 2007
Comments (16)
Enlightning on the why now question...
Posted by evan | February 1, 2008 2:28 PM
I would suggest that after the problems created for Google by MS, on one of its later acquisitions, that Google should also try to stop MS on its purchase of Yahoo, as a monopoly. Turnabout is fair play, and in the case of MS, a monopoly is an evil thing. Google has a lot to gain in trying to block this merger.
Since everything that MS has done has been mostly a failure to compete with Google online, only this buyout of Yahoo, is left to it. MS tried to go cheaper, and only now, when its clear that everything else it did failed, is MS deciding to bite the bullet and buy Yahoo.
MS and Steve Ballmer have said that the future of MS is in Online advertising, and home entertainment. Buying Yahoo, shows that MS is committed to that statement. However, it also shows something that they know by omission. That the future of MS two cash cows, Office and the Windows Operating System are in danger. Linux and Mac OSX are starting to take small market share now, and quite frankly, Windows is an old buggy, insecure, OS, that costs too much. Even MS deep down knows (by omission) that the future does not belong to Windows and Office. And it needs to invest heavily into new sources of revenue, before the two cash cows start to decline sharply.
MS is a one trick pony, Joe. Once people move to other non-windows platforms, all the MS house of cards will fall. Unless, MS can move into the businesses that Steve Ballmer has stated that is the future of MS.
Posted by chips | February 1, 2008 2:50 PM
Gee, $44 billion of shareholder equity thrown down a rat hole, on top of the $6 billion already wasted by Ballmer's crew on other failed initiatives.
This is the corporate equivalent of buying a Miami Beach condo today, at 2005 prices. I'd ask what they were thinking, but that implyies a rational, considered process and analysis, something obviously missing these days in the hallowed halls of Redmond.
Posted by Ed T | February 1, 2008 3:02 PM
I don't think Google should fight the acquisition. Psychologically it would look better that Google isn't bothered by it. Google would look more confident. And Google should make the bet that the acquisition will hurt MS anyway. But, I could be wrong.
I am so interested in how MS is going to work this Yahoo integration. Oh the teams they will put together to try and make this work smooth and seamlessly.
Posted by Tom Berber | February 1, 2008 3:22 PM
From: Stephen Arnold: The Google Legacy (2005)
In terms of technology, Google has the hardware and software engineering expertise to build
applications rapidly, perform computationally-intensive applications quickly, and deliver
high-reliability services from low-cost, commodity hardware.
Yahoo! operates differently from both Google and Microsoft. Yahoo! is in mid-2005 a direct
competitor to Google for advertising dollars. Yahoo! has grown through acquisitions. In
search, for example, Yahoo acquired 3721.com to handle Chinese language search and
retrieval. Yahoo bought Inktomi to provide Web search. Yahoo bought Stata Labs in order to
provide users with search and retrieval of their Yahoo! mail. Yahoo! also owns
AllTheWeb.com, a Web search site created by FAST Search & Transfer. Yahoo! owns the
Overture search technology used by advertisers to locate key words to bid on. Yahoo! owns
Alta Vista, the Web search system developed by Digital Equipment Corp. Yahoo! licenses
InQuira search for customer support functions. Yahoo has a jumble of search technology;
Google has one search technology.
Historically Yahoo has acquired technology companies and allowed each company to operate
its technology in a silo. Integration of these different technologies is a time-consuming,
expensive activity for Yahoo. Each of these software applications requires servers and systems
particular to each technology. The result is that Yahoo has a mosaic of operating systems,
hardware and systems. Yahoo!'s problem is different from Microsoft's legacy boat-anchor
problem. Yahoo! faces a Balkan-states problem.
If Microsoft acquires Yahoo!, which seems likely, it will face a daunting integration effort. The difficulty of integrating Microsoft services with Yahoo! services will be compounded by Yahoo!'s internal, legacy integration issues. If this was my problem, I'd be looking at refactoring the myriad services to use a common hardware and software infrastructure. That kind of refactoring would be a huge undertaking. But, I think it would be necessary if Microsoft is to wring value out of the acquisition.
Posted by Karl | February 1, 2008 3:24 PM
@Tom Berber:
You and I were thinking along the same line - at the same time! Well, two minutes apart. :)
Integration will be a big job. It would be fun to be a "fly on the wall" during those team meetings. I imagine one faction will advocate a "hammer to fit; paint to match" approach while another will advocate a ground up refactoring.
Refactoring will be high risk - high reward. Bandaiding may be less risk, but the ongoing maintenance costs will be high - perhaps so high that they offset the benefits gained.
"Google should make the bet that the acquisition will hurt MS anyway. But, I could be wrong."
Yes, but if MS does the integration wrong, you may well be right.
Posted by Karl | February 1, 2008 3:54 PM
quoting Karl;
"If Microsoft acquires Yahoo!, which seems likely, it will face a daunting integration effort. The difficulty of integrating Microsoft services with Yahoo! services will be compounded by Yahoo!'s internal, legacy integration issues"
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Some nice thought here Karl.
I would also add, that Yahoo by itself was starting to lose share against Google, but not like what MSN/Windows Live, or whatever the MS online name is this week.
The problem for MS is, that few people see any value in MSN/Windows Live, which is why Google is doing so well. Yahoo, is much better than MSN/Windows Live, and MS will only mess it up if it trys to intregrate much of MS services into it, or use its own people to run Yahoo. What MS should do, it won't, that is to use the Yahoo people to run MSN/Windows Live, and not mess up Yahoo with its "services" that most people do not want.
In fact, MS should turn over MSN/Windows Live to Yahoo management to run and make into more of a "Yahoo type of clone."
Posted by chips | February 1, 2008 3:55 PM
I never thought Ms would be so desperate.
A rather long time ago, Ms realised that its way of doing business would be obsolete in the future. What Ms never thought was that it would speed its own downfall. Vista has hurried the times and has occasioned bewilderment to Ms.
What surprises me is the level to which Ms' desperation has taken it. It's level of confusion is shown by acquisitions of over-valued companies such as aQuantive (this is serious because Ms' speciality is to acquire under-valued companies).
Ms' offer to buy Yahoo! will probably be one of their biggest blunders up-to date, even counting Vista. This is clearly one of the cases in which 1+1 does not equal 2. Leaving aside the fact that the union of two giant companies is a difficult matter, Yahoo's clients like Yahoo: Not Ms, not Google. Even more so, if a company provokes and creates rancour from people. It could be highly likely that Yahoo's manpower (clients and workers) leave Yahoo-which would not be Yahoo any longer, but Ms.
A while ago I wrote that those who want Ms to fall should be pleased that Ms is bought Yahoo, since this will produce chaos. Something similar to the ATI and AMD, with the difference that AMD is charismatic while MS is not (While the causes are different, the effects will be very similar).
To those who haven't realised, all that MS touches looses value. This is due to own errors and the shift in the perception of the consumer: Ms is now the Dark Empire.
But those who don't love MS should not celebrate just yet. It is highly unlikely that the US government will allow this union.
Posted by Marco | February 1, 2008 4:55 PM
It should say:
"Even more so, if a company provokes and creates rancour from people, that's Ms."
Posted by Marco | February 1, 2008 5:00 PM
Won't those good Yahoo employees bail now before the acquisition happens? That would leave Yahoo wounded, even if it doesn't happen. Then MS could try to grab that failing marketshare. Don't underestimate the capacity for MS to think in those terms.
Posted by george | February 1, 2008 5:55 PM
To Marco,
"It is highly unlikely that the US government will allow this union."
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Perhaps, but I think that MS owns the US government presently, and the politicians that will soon run it after the next election. However, it will face a much tougher sell in the EU.
The big question is, how long can MS continue its dominance of the home desktop market, when it produces sub-standard products like Vista? When its competition, both Mac and Linux release new systems for less, or free, every 6 months? This is what is driving MS to make buys like Yahoo. MS knows that sooner of later, users will move. Therefore, as Steve Ballmer has said, the future of MS is the Internet and entertainment. (not windose or office)
Even if MS could make a decent Windows Seven, it would still cost too much compared to the competition, so the long term price of Windows and MS Office must come down in time. Which spells bad news for stockholders, as the profit to cost ratio on a declining products fall. Not to mention, less users buying it if the EU stops the pre-installs, or more OEM's bolt.
Posted by chips | February 1, 2008 5:57 PM
I think Marco nailed this one - the public will decide! In short, the masses of users will determine if the "MS Gamble V1.00" is a success or not.
Right now, Apple is en-vogue - as is Google - so it will take more than an evangelist to sell this one! It's actually got to be good!
Posted by The Vigillo | February 1, 2008 6:50 PM
Rest in peace Yahoo!!!
If Microsoft finally gets Yahoo! we wil see how a company transforms to nothin....We must only see what Microsoft has done wiht MSN, Nothing and We can believe that this time the big M will do the right thing with Yahoo!, please wake up... Microsoft has lost credibility over its internet strategies, they are desperate looking for something to waste money. A company this big can't do business without using its brain... Yahoo is dead, long live Live.com, msn.com, whatever.com, but these Microsoft attempts won't attract more users, nobody believe in dead thing.... Yahoo! is dead if Microsoft gets it.
Posted by frank | February 1, 2008 8:14 PM
To Chips:
It is possible. I forgot that MS+yahoo=30-35% and google is 60-65% of the Market (and growing)-but then, is it not perturbing (to MS) that all those who are NOT Ms supporters are NOT worrying? and that people who favour MS are skeptical?
Well, maybe Ballmer is a genius and can see stuff that no one else could...no, this is not a joke (Ok, perhaps a tad)
BTW: Thanks, Vigillo.
Posted by Marco | February 1, 2008 8:16 PM
To Marco;
I am not worried that Yahoo will fail once MS takes it over and provides the same excellent leadership (Lord Baller) that has made MS/Windows Live/WindowsMSN Dead/whateverMSN this week, such a declining market share success. But it will take time for Yahoo to fail. Expect many users of Yahoo mail to switch to Gmail at once should MS buy them, with their home page gone too.
Ballmer is not a genius, but once in awhile, he does say something of common sense, albeit not often. That the future of MS is not Windows or Office, is something that he has stated by omission.
What I do worry about, is the nature of MS, even with 30% of the search engine market, MS might try to push on users more of its Net platform, more of its file formats, more of its IE compatibility problems. Or in other words, Embrace, Extend, and we get it. It is about trust, not only do I not trust MS, it what I would expect from them. Use almost any unethical means to win, that is what I expect from M$.
Posted by chips | February 1, 2008 9:06 PM
Good points Joe, but I think you've missed the boat.
The REAL reason for the timing is that CEO Semel left LAST NIGHT. I don't know the timeframe, down to the hour... but it sounds like the Microsoft's messenger boy literally passed Semel in Yahoo's lobby.
Posted by uhura | February 1, 2008 10:08 PM