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Monday, April 7, 2008
Microsoft Yahoo Merger/Acquisition
Microsoft yesterday decided they were putting a time limit on Yahoo to decide whether they wanted to peacefully be acquired or whether they wanted Microsoft to pursue a hostile takeover. While there's certainly some merit to Microsoft's efforts to finalize the deal - especially because Yahoo seems to be shopping themselves around through efforts with Google and MySpace, this really gets me back to the point of whether this was a good idea in the first place?
While people are arguing the benefits of combining two players who are having a difficult time competing against Google, I'm of the impression that gobbling up a behemoth like Yahoo is only going to cause undue trouble for Microsoft.
First, I'd like to take a look at what each company is bringing to the table. Both have an enormous online presence. Both have an email service. Both have search, maps, news sites, IM, ad services, and lots of attempts at innovation. There's plenty more that they share, but I think it's important to really note their differences, since this is where they can presume to add value. Microsoft has an offline suite of software applications including operating systems/servers. They have hardware too, such as consoles, PC equipment, music players, etc. They are really a hardware and a software company. Yahoo, up until now, is basically a software company. One of the value adds could be to integrate Yahoo's online into offline as well. That's of questionable value since the world is really moving online, not off. What other differences? Well, they both are equally, though differently inept at competing with Google. They don't seem to understand the innovation thing. So I guess this is more of a similarity. Maybe they can cut out all the duplicate crap they provide (just look at their respective cluttered portals)?
What could possibly be the strategy moving forward for Microsoft? If it's to merge their online presences - that's a ridiculous strategy since they will just open up the market to the next players down the line. If it's to keep their presence the same - well then what's the benefit, besides maybe laying a few people off in this new company? In my opinion that should have been done by each of these companies anyway. If it's to improve innovation at Microsoft in the online world, well, Yahoo has shown that they can't keep up with Google in that respect anyway - and Microsoft definitely can't. Maybe it's just to shake things up for two stalling companies. If it is, well, that's a crappy reason to spend 44 billion dollars.
I'm really having a hard time seeing the synergies that could make this work. In addition, I'm reminded of all those large mergers in the past that haven't worked despite the fanfare. Compaq/HP, Sprint/Nextel, WorldCom/MCI, AOL/Time Warner. Sure HP is doing well - but that's as much a result of management changes than picking up Compaq.
Well, time will tell and I may be proven wrong. I'm just not ready to jump on this bandwagon.
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2 major streams of synergies:
1) Cost - Consolidation of services
2) Building an efficient marketplace
Consolidation: The current hardware (fixed cost) to support all the services that these 2 companies provide require a massive investment. By combining these two companies, one can hope that they will consolidate their fixed cost/maintenance cost.
Marketplace: By becoming a bigger number 2 search player these companies are going to enable a better marketplace for search which in turn means that the revenue per search (denoted as RPS) - a measure of efficiency in search - will be higher. Essentially an efficient marketplace (ebay, NASDAQ, Google Adwords) requires high participation of supply and demand, and by merging 20% (Yahoo) and 10% (MSN) microsoft is going create that better marketplce.
Yes this is going to lead to layoffs and a lot of management turn. There are more odds that it wont work. Primarily the cultural difference etc etc etc, but there is a chance of this working. One can argue HP/Compaq did it, but they had the benefit of being in an industry which is slow moving.
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