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Microsoft bids $44M for Yahoo!

2008-02-01 5 min read Web marco

Ok, the market and I saw this coming: Microsoft just announced last night they were going to start an unsolicited bid for Yahoo! at a share price of $31. There had been rumors (confirmed with the bid) that Microsoft and Yahoo! were talking about a merger, but (as Microsoft confirmed) they went nowhere fast.

As an ex-Yahoo!, and one that cares about the company a lot, I am sad to see one of the flagships of the Internet (potentially) disappear, but it was a catastrophe long in the making. At the same time, the transaction makes perfect sense for both parties involved at this stage in their life, and I wish the best to both bidder and biddee (that sounds so like bidet…).

Oddly enough, the two companies have never liked each other. On Yahoo!’s side there was always the impression that Microsoft had been an unfair competitor in the early days. More recently (after the Microsoft antitrust trial, that is), Yahoo! felt that Microsoft was unfairly subsidizing its online unit (then MSN, now Windows Live!) with profits reaped from the unrelated OS business.

Microsoft people I spoke with told me in hushed tones that Yahoo!s were rumored not to be all too smart but very full of themselves. How much this is indeed a reflection of a general attitude, I cannot tell. It seems to be reasoned, though, that these two fierce competitors would have developed a certain enmity towards each other.

The culture of the two companies, founder ethos aside, is very similar. They develop products in a very similar (and completely broken) fashion, and both have forgotten how to innovate. I should say: innovation has now become a matter of features in both companies, and not of fundamentals.

When I left Yahoo! in 2003, my management asked what made me leave. I said that it was deeply frustrating to work in a technology company that thought of itself as a media company: the power was entirely in the hands of (fairly unseasoned) product managers, while the technology department was overstaffed and highly inefficient.

I said that the company was looking at AOL and Microsoft as its competitors, just because they were the companies most similar in structure. I thought, though, that the real value of Yahoo! was in its applications, not its content, and that the first entity with a strong focus on technology and apps would just shoot once, and make do with Yahoo!’s relevance.

I should have known back then: that competitor would be Google, but I didn’t see it coming. Of course, I was one of the idiots that didn’t buy Google stock at $85 at the Dutch auction, so you better take anything I say with a hillock of salt.

Why does the merger make sense? For Microsoft, it means swallowing a huge campus in Silicon Valley, with a whole recruiting network and faithful ex-employees attached to it. Seattle and Redmond are not looking too hot these days, despite global warming, and Google has once more shown that California is where people want to be.

Microsoft will buy out a company that has an extremely visible presence on the Internet. The one statistical fact we were constantly hammered with at Yahoo! was that the company owned the #34 global brand, and that’s something that Microsoft will be able to leverage. I don’t know how the merger is going to happen, but if I were Microsoft, I would ditch the entire Live division (as a brand and apps, not as people) and make it part of the Microsoft Yahoo! brand.

Microsoft will own a huge chunk of the Internet user space, formerly owned by Yahoo!. If the company is smart about the merger, the billions of page hits and eyeballs are going to stay faithful – they are not there because they like yellow and purple, but because they like the functionality they get.

Microsoft will buy and advanced search engine. Yahoo! completely screwed up the marketing of Panama, the project that was hailed as heralding a competitive position for the company, but Microsoft has better resources there and will be able to generate credible competition to Google.

What’s in it for Yahoo!? The company is deeply depressed, with a terrifying hemorrhage of talent moving in all directions. The stock has been doing poorly for the past year, and senior leadership is decimated, with a big chunk of those that built the media Yahoo! gone, and nobody to replace them.

By joining Microsoft, Yahoo! employees get a boost in leadership. Additionally, unlike in other mergers, Yahoo! is big enough (especially compared to Live) that it won’t be just swallowed by its parent, but will be a considerable division. Thus, despite moving into a world ruled out of Redmond, Yahoo! stand to have their independence retained. And they finally will be able to start competing seriously with Google: so far, each battle was decided at the onset, with Google the clear winner.

What are the risks? There are technological risks: Yahoo! is almost entirely built on open source software, and the engineering team is very proud of their accomplishments. Well, after a period of transition, I cannot imagine that going on forever. FreeBSD is likely to be out the door, to be replaced by Windows. How is that going to affect the engineering department, especially considering the lure of thousands of jobs specifically in open source?

Aside from this, the risks seem to be minor. Yahoo! doesn’t have a lot of egos floating around at the top level, and the few remaining ones can be integrated with the egos at Microsoft. The development process is broken in exactly the same way, but now Yahoo! can take advantage of the subsidizing coming from the OS and Office divisions (they could of course just fix the development process, but neither company seems to be willing to invest the time, money, and power struggle to do so).

All in all, I say it’s a brilliant merger between two unequal partners, that though have a ton to give to each other.