What Does The Yahoo/Microsoft Debate Mean For The Rest Of Us?
February 4, 2008
When Microsoft announced its acquisition offer for Yahoo, some of my coworkers at VantagePoint remarked “it’s about time, this should have happened a long time ago”. Earlier today I was reading Fred Wilson’s (from A VC blog) take on the deal. Fred argues that Google will emerge as the champion of search because more oversight from a behemoth like Microsoft will not solve Yahoo’s problems. The more blog posts I read on TechCrunch, VentureBeat and others, the more I realized that the Valley is deeply divided on this issue. I would argue that this is probably the most important event in its history. Let’s a take a deep look at the two sides of the argument here and analyze the most relevant factors.
Pro Deal/Pro Microsoft/Anti Google
1. Dominance of the internet
With Google enjoying a clear lead and growth momentum over Yahoo/MSN/AOL, the company needs a serious competitor with deep pockets. If not, Google will totally dominate the internet, resulting in lower innovation and development. Microsoft needs to step in to prevent this happening and its timing is highly astute given Google’s emerging antitrust problems in the EU.
2. Solutions to Yahoo’s problems
Microsoft, with its significant balance sheet and experience in software, is a powerful ally for the Yahoo platform. Microsoft can distribute its future Windows Live software using Yahoo’s massive user base. Leveraging Microsoft’s dominance in software is likely to fuel new users for Yahoo, thereby improving page views, uniques, ad sales and other key metrics. Furthermore if Microsoft and Yahoo combine forces in search technology, the likelihood of creating a Google-beating technology is increased. The future is in online marketing, and “Microhoo” will have the financial muscle to ensure that Google does not gobble up the DoubleClick’s of the future without a ferocious bidding war.
3. Shareholder desires
Microsoft’s $31/share offer in cash and stock is unbeatable. Few companies have the balance sheet (or the nerve) to engage in a bidding war with Microsoft. The bid effectively reduces years of uncertainty regarding Yahoo’s future and gives shareholders a well deserved exit strategy.
4. Legal issues
Let’s face it, Microsoft is no stranger to antitrust litigation. While Google is raising concerns regarding antitrust, the company is likely trying to buy time in order to break up Yahoo and help the company fend off the hostile bid. This can already be seen in the Microsoft legal team’s rapid fire responses to any PR statements issued by Google.
5. Impact on the Valley
The Microsoft/Yahoo deal has a positive impact on Silicon Valley because the two entities are likely to spur M&A activity and create lucrative exit opportunities for VC portfolio companies and other startups. The deal lends new credence to the internet and a sense of confidence that has been missing since the last bubble.
Anti Deal/Anti Microsoft/Pro Google
1. Dominance of the internet
Microsoft is simply applying their software dominance strategy to the internet. If the Microsoft/Yahoo deal goes through, the internet risks becoming a total monopoly just like the PC software market. Microsoft has a history of megalomaniac tendencies and this deal is a symptom of those tendencies.
2. Solution to Yahoo’s problems
A new corporate oversight framework will do little to appease Yahoo’s division managers who are tired of not being able to operate like mini-CEOs. Bureaucracy is the worst form of medication for innovation and does not solve Yahoo’s core problem: the fact that it’s become a conglomerate. The ideal solution is to spin off its various portals to independent parties to create focused “category killers” in niches like finance, celebrity gossip, autos, homes, etc. Additionally, the company should license Google’s search technology since competing against Google in search is too difficult.
3. Shareholder desires
In the long term, shareholders will gain from a broken-up Yahoo rather than a bloated Microhoo. Shareholders are willing to push the Microsoft/Yahoo deal through since they are looking to make short-term gains. An independent Yahoo is ultimately better for the company and better for smart investors.
4. Legal issues
While Google is claiming legal issues, Microsoft probably wins in this category. If Google outsources its search technology to Yahoo, the only remaining competitors in search not using Google’s underlying technology are Ask.com and MSN. Essentially, this may gave Google total domination over the entire search market and that’s…no problem. I mean Google’s motto is “Don’t Be Evil” right?
5. Impact on the Valley
A leaner, broken-up Yahoo is likely to make acquisitions that make more sense for each division. Many have questioned Yahoo’s corporate development strategy in the past. If Yahoo’s division individually make intelligent acquisitions that add business value, the volume of overall M&A is likely to increase as startups are better integrated.
So what does all this mean? To be honest, I’m already flabbergasted by the intensity to which this debate is raging on in the blogosphere. I think it’s safe to say that some kind of deal with Yahoo is on the horizon. In the end, it’s all in the hands of Yahoo’s shareholders. My instinct is that the shareholders will take the Microsoft deal and run, but who can predict these things? Given Google’s reactions this morning, they are not going to let this go by so quickly. Google’s banking team may propose an all-cash break-up offer for Yahoo that may be significantly higher than Microsoft’s premium. Assuming that Google then outsources their search technology to Yahoo (as Fred Wilson desires), this may originate new antitrust issues.
This one is for the veteran dealmakers to figure out, and the stakes are high. Only one thing is for certain. The winning side is likely to win the internet game.
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[…] This subject has already been blogged about extensively by major tech blogs and also on this blog. Click here for my take on the […]
[…] the articles on the proposed Microsoft (MSFT) buyout of Yahoo (YHOO) at My Wealth Builder and MarketVise. I hold Microsoft in the Fat Pitch Financials Portfolio and I expect to be following this story for […]
[…] sounds like a savvy insider—at what the battle of the giants has to do with you and me. What Does The Yahoo/Microsoft Debate Mean For The Rest Of Us? posted at […]
See Esther Dyson’s piece on the topic at Huffington Post:
http://www.huffingtonpost.com/esther-dyson/release-09-dont_b_85822.html