Microsoft buying Yahoo!

Despite a long history of unsuccessful corporate mergers and acquisitions (M&A), captured by now by the dismal M&A rate of success (~30%), M&A comes in and out of fashion as a favorite growth option. Ever wondered where these [...] ideas about M&A might have come from? Seneca--the Younger--would have answered: cui prodest. We, from Tech Trade Daily, learn about a Merrill Lynch analyst's research report whereby Microsoft is being advised to acquire Yahoo!.

The stated rationale behind such advice is: Google's assumed internet preeminence; Microsoft's failed MSN; Microsoft can afford the cash and debt, and needs, to buy a company the size of Yahoo!; and, in the analyst's own words:
Yahoo! seems a strategic fit based on: 1) Microsoft's search/advertising focus across the PC, mobile devices and video game consoles, 2) natural ad platform and cost synergies and 3) elimination of a top competitor.
I am not sure how the conclusion that Microsoft needs to buy something the size of Yahoo! was reached. Lest we forget, Microsoft still has to make sense out of its two last largest corporate acquisitions, Great Plains and Navision. These two companies were not structured as differently from Microsoft as Yahoo! would be, and came both for at a tenth of the cost of Yahoo!.

As a side note, I could imagine the transformational power of targeted advertising, which at the limit would place a future successful business in between a buyer and a lot of her transactions, but would have a hard time betting the future of a today successful company on that prospect. Indeed, who doesn't recall the late '90s projections behind e-commerce, and Amazon.com in particular, yet we see how hard it's been to change the industry structure.

As a second side note, since the Merril Lynch analyst seems troubled not a bit by reduced competition on the internet, one can tell how much he cares about consumers welfare.

Not for lack of rigour, we are then being told that, in the worst case scenario, failure would cost Microsoft $5/share. Some people simply don't know a typical organization from a hole in the ground, our analyst doesn't seem to know that, from an operational perspective, $1 at Yahoo! may be very different from $1 at most Microsoft. Indeed, while Yahoo! has become a media company, Microsoft, according to its current corporate structure and $12 Billion annual revenue, is so much more about enterprise and consumer software platforms and applications than a(ny) media entity. And, unless all computer applications, consumer and enterprise, are going to be delivered like the little gadgets from Google or Yahoo!, why would one want to make Microsoft a media company? Moreover, some seem to have forgotten AOL-Time Warner proved how difficult it is to join even two media companies. How can one think of grafting a media giant like Yahoo! onto the rest of Microsoft when they have so little in common? So, when pricing the cost of the option of buying Yahoo! only at $5/share, cui prodest?

Without doubt, there is plenty of revenue potential in approaching the internet more like a media business, but so is in the non-media business Microsoft has been so successful at. As I wrote here, Microsoft would do better if separated its consumer and enterprise businesses. Should that happen, one can see less structural obstacles to a joint Microsoft-Yahoo! entity. Otherwise, some in the M&A field must be reminded that corporate entities rarely make for additive operations. The rest of us, when not knowing an answer, would do well to return to classics.


5 comments:

GB Technologies said...

Interesting article. I would love to see this M&A happen or the speculation around it.

Manuel said...

Let's close our eyes for a second and assume that Merrill Lynch analyst is giving, free and unbias result. Than let's open the eyes again. How much (3-6% of the transaction) will ML gain if they will be advisors to the deal. Great, self serving advice!

fCh said...

GB Technologies, You may have your own reasons for this M&A to happen. As for the speculation part, what can I add to the fact that Google has stricken the internet staus-qvo with panic? eBay, Yahoo!, and possibly Amazon.com, are all shown their limits, whereas Microsoft loooks limited in all but how much cash it can burn.

Manuel, you bring up an interesting point. I would go a step further and say that the i-Banks are facing the prospect of lower revenues as we speak. The indication one has for such prospect: The unprecedented profit gains made by most i-Banks recently; that's the smell of bubble, so any M&A can help.

Tiffany said...

Microsoft turning into Pacman. How rich is rich? Well, I guess not rich enough for them.

S K L said...

I believe Microsoft has 40 odd Billion in reserve...