Deal or No Deal for Microsoft and Yahoo
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February 8, 2008 - 1:00amMicrosoft shook up the Internet last Friday when it announced its intentions to buy Yahoo for the ridiculously large sum of $44.6 billion, over 60 percent more per share than the price at which the company’s stock is currently valued. Although it certainly did not come out of the blue, the idea of the “big three” — Google being the third in the triumvirate — collapsing to the “big two,” coupled with the overall depressing conditions that have gripped the market in the last month, sent a chill down the spines of web surfers everywhere.
Now, the big papers and blogs seem to be writing off the anticompetitive concerns of this deal. They say that because Yahoo and Microsoft do not compete directly in the same industry, there should not be any problems getting the merger past government regulators. I think we need to be slightly more concerned than that. Currently, Yahoo is the only company truly competing against Google in the race to push the bar of web usability and functionality forward. Microsoft’s MSN and Windows Live offerings provide no substantial innovative competition, and if the Redmond monster devours Yahoo and “embraces and extends” its apps into the ground, then Google will essentially sit alone at the top of the hill. If you’ve studied any small bit of economics, then you probably recognize why this is very bad.
I don’t think this is a good strategy on Microsoft’s part either. $44.6 billion — a lot of it in cold, hard cash rather than stock options — is a gigantic sum, even for their deep pockets. And what do they gain by acquiring Yahoo? Obviously, someone in Redmond is hoping that the merger will close the gap between them and Google, but it just isn’t as easy as that. Integrating two massive companies will be a Herculean effort that could take years, in which time Google will be able to adapt and prepare for any added challenge.
In addition, if Microsoft really wants to reap full value from the deal, they will need to realize that everything — and I mean everything, from search, to email, to instant messaging — Yahoo was doing was better than their own offerings. Given Microsoft’s past record of stubbornness and pride, it stretches the imagination to believe that they would be willing to essentially scrap everything that MSN has done over the last two decades in favor of a competitor’s offerings. And if they can’t take this step, then all they have bought is Yahoo’s customer base, much of which would resent the takeover and switch to Google anyway.
Both American and European regulators have said that they will be looking at the deal closely (remember, both companies are multinational, so they’ll need approval everywhere). However, hostile takeovers — and all indications point to Yahoo fighting this bid tooth-and-nail — can take a long time to play out, and given that the current administration is on its way out, there’s no way to gauge whether or not the new Feds in 2009 would be inclined to let this deal go through.
If I were in Washington, I’d be reticent to give my blessing to this marriage. Yahoo definitely needs help, but this is entirely the wrong way to go about doing it. Ultimately, Microsoft is going to find that even for all of Bill Gates’ fortune, it can’t just buy a new image overnight. Changing a reputation for stodginess and stagnation will take effort and time, and tearing apart Yahoo is certainly a step in the wrong direction to begin that process.