Yahoo? Microsoft’s battle cry as it tries to bust its way to the top of the web business sounds a bit wobbly. Its offer for Yahoo is punchy enough, equivalent to 60 times 2008 earnings. And the letter to Yahoo’s board is an artful exercise in passive aggression – bottom line: we like your company, we’ve given you a year to sort it out, now sell up or get out of the way.
There is an underlying theme of desperation summed up in one word: Google. It has a 58 per cent market share in US search, using Comscore’s data, against Microsoft’s 10 per cent. Combined with Yahoo, that would rise to one third. On paper, marrying Microsoft’s deep pockets and tech expertise with Yahoo’s vast base of users and media-savvy makes sense. What’s more, Yahoo is weak. Prior to the offer, its stock had fallen by a third during the past year. Against that, shares in Microsoft, which is funding half the deal with its own paper, was up 6 per cent. This week, Yahoo delivered a gloomy outlook for 2008, dashing hopes of a quick turnround.
Microsoft’s difficulty is that, while it has to act now, there are big obstacles to pulling off a successful transaction. Regulators, particularly across the Atlantic, will scrutinise any deal closely. To head off this threat, Microsoft emphasises the need for a stronger second player to compete with Google. Meanwhile, the high premium reflects the need to block interlopers and perhaps overcome entrenched antipathy to selling a much-loved brand to the sector’s leviathan – à la News Corp and Dow Jones.
Microsoft’s offer of big retention packages also speaks to fears that a deal could prompt a mass exodus of talent at Yahoo. Indeed, melding the different cultures and technologies of these two companies is an enormous task. Microsoft has done many deals, but none of this size or complexity. Just getting it done will not be easy. Proving Microsoft can then actually transform Yahoo into a better business will be much harder.
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