Yahoo, MSN 'Will Die'

Bloggers weigh in on the prospects for a deal and for success if it does take place. Skepticism abounds

Shares of Yahoo! (YHOO) surged on May 4 after reports that the Internet giant may merge with Microsoft (MSFT). The stock, which closed at $28.18 on May 3, soared 17% to more than $33 a share, before closing at $30.98. News that Microsoft has intensified its pursuit of Yahoo and requested the company to enter formal negotiations was first reported by the New York Post. Neither company has provided public comment.

Microsoft and Yahoo have discussed a combination or an alliance before, but the talks never advanced, in part because of personnel and cultural clashes. The two companies may have more common ground these days, however, particularly as Google (GOOG) has become steadily more powerful.

Google is taking market share from Yahoo in online search and in online revenues. Google has also begun to introduce software that competes directly with Microsoft, including its highly lucrative suite of word processing, spreadsheet, and other productivity programs (see, 4/9/07, "Is Google Too Powerful?").

The new round of talks may have been sparked by Google's acquisition of DoubleClick. While Google has been dominant in the online advertising that accompanies search results, DoubleClick provides it with the technology to extend its business into display advertising and online video advertising (see, 4/14/07, "Google's DoubleClick Strategic Move").

Pundits Weigh In

The deal would be the largest ever acquisition for Microsoft, but certainly manageable. Yahoo's market capitalization before the deal was announced was $38 billion, and the speculation is that the purchase price would be around $50 billion. Microsoft's market cap is nearly $300 billion and it had $28 billion in cash and short term instruments on its balance sheet as of Mar. 31.

Pundits on the Net quickly offered their opinions. There is plenty of skepticism about a merger because of the size of the deal, the differences in culture, the abundance of executive egos, and the redundancies in technology.

One of the severest critics is Henry Blodget, the one-time analyst at Merrill Lynch (ML), who now writes the Internet Outsider blog. "If Microsoft buys Yahoo, Microsoft should immediately spin the Yahoo-MSN business out as a separate company," he writes. "If it doesn't, both Yahoo and MSN will die."

One writer at Search Engine Watch's blog argued that in the all-important online search, the two companies have loads of overlap. The site's Kevin Newcomb makes the point that since the preliminary talks last year, Microsoft has built its own search ad system, and Yahoo has upgraded its search capabilities with its Panama technology. "There's not a whole lot that a merger would offer either company, at least on the search side," he writes.

Consolidating for Benefits

But others see plenty of potential in such a deal. Microsoft and Yahoo are both top players in instant messaging and Web-based e-mail. So combining their technologies would provide greater scale that could be use to drive more revenue and develop new technologies.

The two are also No. 2 and No. 3 in online search, so combining their market shares could give them the scale and customer relationships to make a serious run at Google. "This is completely logical," writes Glyn Moody, a technology journalist who pens the OPEN blog on open source software and other topics. "Microsoft is getting so utterly trounced by Google that it needs to bulk up fast in the online search sector and its related fields."

Joe Holato, a search marketing analyst who writes an eponymous blog, argues that consolidating certain operations from the two companies could yield big benefits. In particular, combining Yahoo Mail and MSN's mail service would create a giant. "Those could be combined as well to utterly dominate the world of Webmail," he writes.

Layoffs may be in the works, however, if a merger takes place. Venture capitalist and blogger Robert Lawrence predicts that Yahoo could face cuts in its businesses because of the redundancies with Microsoft. "I picture a post-acquisition Yahoo with many of their parts being shut down," he wrote.

Second Fiddle

There may be a fundamental flaw in the strategy of Microsoft going after Yahoo. Many experts believe that Microsoft has struggled on the Internet not because of a lack of skill or smart people but rather because its Net strategy has always been subordinate to the traditional software business, particularly the Windows operating system and the Office productivity suite.

"Microsoft has done no better than become an Internet also-ran," writes Blodget at the Internet Outsider. "Why? In part because of internal politics: In Redmond, the Internet business will always be second fiddle to the Windows/Office cash machine. In part because of talent. Why would the best Internet talent want to work in a small division of a massive company, kowtow to Windows/Office kingpins, and get paid in stagnant Microsoft options, when he or she could become a billionaire at the next Google?"

Blodget does offer up a possible solution to the strategic clash. "If Microsoft spun out Yahoo-MSN, the company would be able to recruit the best talent, run its own show, and, if necessary, compete with the Microsoft empire," he writes. "The company could have an exclusive technology deal with Microsoft and get first crack at all partnerships. Most importantly, existing Microsoft and Yahoo shareholders would benefit: Microsoft would be the company's single largest shareholder."

He closes by saying he doesn't think that scenario is likely to play out. "Alas, this sensible solution seems unlikely," he writes, "because ego will get in the way."

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