Microsoft – Yahoo: Will End Up Helping Google Win the Web Game

Like many, I have had an eye on Yahoo stock for a while.  Having bought and sold it around $30 a few times, the weakness of the last few months made it look appetizing.  I never got around to buying any.

So, I can relate to Microsoft.  The opportunity to fortify its web arsenal against Google is attractive.  It’s also a  very sensible area to spend the tons of cash the company has sitting around.  Wall Street would approve, as well.  All around, it seems like a pragmatic move.

However, I don’t think it can succeed.  M&A transaction, like organ transplants, have some compatibility requirements.  Microsoft and Yahoo are inherently very different companies.  I think they can manage to combine reasonably well, but the resulting entity will still not have what it will take to cacth Google.

What has kept Google the winner in the web game is its DNA.  Google was born on the web, grew by respecting the web ethos and, now, as a large company, has largely managed (I understand the credit goes to Brin and Page) to make sure its critical moves are guided by its web DNA.  Even though its revenues are largely from advertising, Google remains a technology company.  It creates technology and pushes it out to the edge, where value is created.  (Facebook is another example of a company that appears to do this very well.)

Yahoo, although it was also born on the web, has evolved into a Media company, presumably because of Terry Semel’s sensibilities.  It was never a technology company.  It has media DNA.  Media is an IP sector.  It’s about protecting and monetizing your IP.  Value is generated at the core.

Microsoft has strong technology DNA but it never managed to become a web company.  It is a software company at heart and software is a sector driven by IP monetization.  Furthermore, Microsoft is a  company with aggressive tendencies (which the web sector has labeled "evil") and, has become tremendously successful by creating technology, keeping it at the center and protecting and monetizing it very aggressively.  The value is created at the core.

Value at the edge versus the core.  This is the key difference between Google and its competitors.

I don’t think you can change a company’s DNA.  And a company with software DNA buying a company with media DNA will not be able to beat Google in the web game.

So what do you do?

For me, the best advice comes from Henry Blodget.  To summarize:
 

  • Microsoft and Yahoo combine their Internet forces and assets in a stand-alone company called "Yahoo"
  • Microsoft
    will trade its Internet division and $10-$15 billion in cash for 51% of
    the combined company’s stock (resulting in an overall valuation similar
    to Microsoft’s $45 billion offer). 50/50 would make sense, but Steve
    won’t agree unless he has control, and Steve holds more cards.
  • Microsoft will control a majority of the board.
  • The
    new board will immediately decide on the combined company’s management
    team, and that team will immediately take control of the company. Not
    in early 2009. Now.
  • Steve will be chairman of both boards.

  • Stand-alone company will be free to do whatever is necessary to
    maximize the value of its own business, without having to worry about
    whether this hurts Microsoft’s core business.
  • Stand-alone
    company can grant stock options and hire and retain top talent who
    don’t want to hitch their wagons to Windows and Office, be employees
    number 79,862 and 79,863, and work for Microsoft.
  • Stand-alone
    company will avoid the bureaucratic nightmare of having to fight for
    resources from a senior team who are also worried about fate of
    Windows, Office, Xbox, etc.
  • Stand-alone company won’t have to
    compete with IBM, Oracle, Software-as-a-service vendors, Sony, Apple,
    and Research in Motion in addition to Google.
  • Stand-alone company will have a massive war chest and will be able to compete with Google for acquisitions.

Good thinking from Blodget but I can not imagine this happening.

Much of the DNA and "edge vs. core" thinking in this post has been cultivated through via Umair’s writing, who thinks the deal is a horrible idea and:

…that this is the end of Yahoo as we know it. Fine – the real Yahoo, sadly, suffocated a long time ago.

The
real point is: this is the end of Microsoft as we know it. Yes, I know,
finally, isn’t it nice, etc – more to the point: the endgame will be to
leave Google more firmly in the driver’s seat than ever before.

For me, GOOG just became a big "buy" at $515.

2 thoughts on “Microsoft – Yahoo: Will End Up Helping Google Win the Web Game

  1. I ditto the sentiment on GOOG being a great buy now.
    While I acknowledge your long term thinking (unfortunately in the long run we all die), there is also a short term catalyst on Google.
    They missed their last earnings by a penny. How can a company the size of Google miss it by a penny? A penny can come out of where the sun don’t shine for Google and unless they wanted to miss it by penny, they would have never.
    Incidentally a lot of employee option strike price negotiations are probably happening these days, so GOOG “not meeting expectations” with the stock price tanking accordingly cannot really be a bad thing.
    So when GOOG beats estimates by a “large” margin during the next earnings call, it can go back to $700. No harm, no foul. Except for retail traders whose continous greed/fear pendulum leaves 90% of the species in loss day after day.

    Like

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