You must have heard by now that Microsoft has launched a bid to acquire Yahoo. I haven’t counted just how many blog posts on it used the word, “Wow!” (sometimes that’s all the analysis they imparted) , but are we really surprised? Jeremy Zawodny says it’ll be our least productive day at work since 9/11 because of all the news. Come on, it’s been talked about forever. Then there was talk of big layoffs, a sure sign they had no good short term answers. And $44B is a lot of money to most folks, but not to Microsoft or even Yahoo really. Where’s the wow? I don’t see it.
Frankly, someone needed to do something to wake them up over at Yahoo. They had run aground and were seriously floundering without making much progress towards getting out of shallow waters. Former Yahoo execs are all over the Valley and paint a grim picture of the internal goings on. So, compared to just gradually fading away to greater and greater degrees of irrelevance, I suppose it is a good thing that someone has stepped up, but this is not a “Wow!”, this is a, “Ho, hum, business as usual, that’s what happens when you the horse can’t run, it goes to the glue factory,” kind of announcement.
Patrick Logan is much closer than the “Wow” crowd when he says, “This could turn out to be the best thing to happen to Google in five years.” Fred Wilson says very matter of factly, “You had to see this coming.” I love Zoli’s shot of Darth Vadar telling Like he is his father. The analogy is apt with Steve Ballmer playing the role of Vadar.
It’s not a done deal yet, either. Microsoft is offering a fat premium over Yahoo’s very cheap stock, and $44B is a lot of money, but it’s could be just an opening salvo with rounds of negotiation back and forth. Put that aside, and let’s suppose the deal goes through. What does it mean?
The combined MicroHoo entity (don’t kid yourself, it’s all Microsoft folks!) will now have 30% search share versus Google’s 60%. They’re not going to knock down the Google castle walls very soon, but it’s a huge step up for Microsoft and it could make them a meaningful competitor, which neither Microsoft nor Yahoo have been until now. Given that people are starting to become pretty afraid of Google, that should be counted as another good thing beyond ensuring the survival of the brand. Although, would you really want Microsoft to win given the way they’ve used their monopoly in the past? More likely people want Microsoft to just slow down Google a bit without winning. Otherwise, we’ll be reading about this epic acquisition years later much the way we read about Gary Kildall giving away the OS business to Microsoft. The analysts of the future will shake their heads that Google didn’t try to acquire or shore up Yahoo in some way.
As for Microsoft, they can certainly afford to pay the $44B. Their market cap as I write this is $285B and the stock is only down 6%, which is much less than the dilution. I read that as the Street thinking this is a good deal that Microsoft will come out ahead on. There is little doubt this is a strategic acquisition as Microsoft is offering 12x EBITDA, which is rich. This may be Microsoft’s last chance to catch Google before it is just too late. Nevertheless, financially and from a bean counting perspective, the deal makes total sense. Shareholders at both Microsoft and Yahoo will likely be happy over this one. Most of the financial analysts are viewing this as a sensible deal.
So how does this deal hurt anyone?
The blogosphere is quick and insightful in its analysis. As Dare Obasanjo quotes, Microsoft has openly said they plan on, “eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity.” That, my friends, is the sound of a whole bunch of Open Source being shut down and replaced by .NET courtesy of Microsoft. I want to talk more about the Open Source ramifications, but they’re just one aspect. There is huge overlap in these entities. You have to wonder what happens to Zimbra, for example? Is Microsoft going to allow web versions of its office apps or not? Will it do so for just some applications like email? None at all?
I love the line from Read/Write Web, “Microsoft is serious about innovation, they just haven’t been doing much of it in house for awhile.” Sorry, but I haven’t seen it. Marshall Kirkpatrick, who wrote that line, sees this deal as not about search and advertising (what Microsoft has said the deal is about), but about bringing Yahoo’s innovation into Microsoft. Is Yahoo really an innovator? Doesn’t seem like it. One would think they would be doing better if they were.
My sense is that Yahoo is mostly about a lot of web traffic. That traffic is scattered across an incredible hodegpodge of properties. If Microsoft can rationalize the properties without losing too much traffic, they will consider that successful. Don’t look for Microsoft to be rooting around all the great innovations and elevating them to pedestals. Look more at the Oracle acquisition model. Some things will be sacrificed. Some things will not be worth rewriting to .NET either because Microsoft already has something close enough (goodbye Pipes, hello PopFly) or because whatever it is just isn’t successful enough to be worth the effort. Microsoft will attempt to push some of that enormous web traffic through its existing properties. Few companies are as good at pushing linkages between every product as Microsoft. This, BTW, is a weakness at Google that they need to address now more than ever.
Can Google counterbid and take Yahoo themselves? Interesting thought from Larry Dignan. I don’t agree it makes more sense for Google though. Google doesn’t need traffic like Microsoft does. Google also has minimal track record digesting a big acquisition. Microsoft isn’t a lot better on that score, but their organization is more robust and they have a great track record running multiple divisions. There is a tremendous opportunity to screw up the acquisition as with any large acquisition. In Microsoft’s case, it would be embarassing and harm the Yahoo division. In Google’s case, it could drag everything else down too because it would be a merger of equals: Yahoo has about the same number of employees. Mergers of equals are always risky.
The aftermath of this deal will be an interesting Rorschach test for Microsoft. We’ll get another look at just how nice a group of people they are to do business with. Are they reformed, or are they completely voracious predators who will seek an unfair advantage and use it ruthlessly. In the end, I expect Microsoft to go the voracious predator route. I’ve written in the past that they needlessly have created a rift with the web, and I think this deal will intensify that rift. They will be under enormous scrutiny, but they just won’t be able to overcome their own DNA.
If Microsoft does follow its historical traditions, then Stowe Boyd has it exactly right when he says:
Personally, I think the Microsoft and Yahoo matchup is like two tired swimmers who bump into each other and then wind up drowning each other in their scramble to survive. But Yahoo will be the first to go under in this embrace.
That’s definitely not a Wow! scenario. It will be kind of sad to watch. I hope it turns out differently.
Microsoft is no longer the enemy. The WSJ riffs on one of those “The Enemy of My Enemy is My Friend” things. In this case, hoping one poorly behaved monopolist can save us from another behemoth is wishful thinking.
A Narrowing Field of Tech Suppliers: Classic repeat of a theme one hears every time a big merger is discussed in any industry. Of course there will be fewer suppliers, that’s what consolidation is all about. But it clears the way for new innovations too.
Mathew Ingram wonders whether two sick dogs roped together can beat one healthy dog. They won’t beat Google. If they’re smart, they’ll focus on using all that traffic for something besides a frontal assault on search.
Yahoo, I’ve long argued, is the last old media company, for it operates on the old-media model: It owns or controls content, markets to bring audience in, then bombards us with ads until we leave. Contrast that with Google, which comes to us with its ads and content and tools, all of which I can distribute on my blog. Yahoo, like media before it, is centralized. Google is distributed.
It’s appropriate, then, that Yahoo is being bought by what one could say is the last old technology company, Microsoft. For Microsoft still operates on a model of control: closed in an open era. They will get along well together.
Will this be big enough to beat Google? No, because big won’t win in the end. Open will.
Remonista has a great post about Yahoo sowed the seeds for this by using Google to do search at a pivotal time.
Phil Wainewright sees the Yahoo acquisition as a great way to catapult MSFT into offering cloud applications. It is, but it remains to be seen whether MSFT will think of things that way. Check back in 6-12 months and we’ll see what happened to Zimbra, for example.