February 01, 2008
Microsoft & Yahoo!
Posted by Gordon Smith

So many questions ...

How does Yahoo! feel about this proposal? The companies have been talking about a deal for 18 months, and Steve Ballmer called Jerry Yang last night to tell him that Microsoft was going public with the offer. Ballmer's letter to Yahoo's board of directors includes the following:

In late 2006 and early 2007, we jointly explored a broad range of ways in which our two companies might work together. These discussions were based on a vision that the online businesses of Microsoft and Yahoo! should be aligned in some way to create a more effective competitor in the online marketplace. We discussed a number of alternatives ranging from commercial partnerships to a merger proposal, which you rejected. While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo! that we are proposing.

In February 2007, I received a letter from your Chairman indicating the view of the Yahoo! Board that "now is not the right time from the perspective of our shareholders to enter into discussions regarding an acquisition transaction." According to that letter, the principal reason for this view was the Yahoo! Board's confidence in the "potential upside" if management successfully executed on a reformulated strategy based on certain operational initiatives, such as Project Panama, and a significant organizational realignment. A year has gone by, and the competitive situation has not improved.

Based on this and the fact that Microsoft's offer is "unsolicited," we can safely infer that Yang is not enamored with the deal.

Does it matter what Jerry Yang thinks? Yang matters, of course, but probably not enough to stop this deal. The market reaction suggests that Microsoft has convinced many people that the deal will happen. The bid is $31, and Yahoo's shares are hovering around $28 (up about 45%). (Microsoft's shares are down around 6% ... perhaps suggesting that Microsoft is offering too much for a depleting asset?) So while it looks far from a done deal, Microsoft is obviously determined and Yahoo's shareholders might be willing to abandon ship. They saw prices like this as recently as last October, but the company hasn't looked like a world beater since the turn of the millennium.

How about antitrust? Former Glom guest, Danny Sokol, is wondering the same thing:

If Microsoft is as dominant as its critics claim, then why has it offered to acquire Yahoo in what seems to me to be a defensive move because of the threat of Google to Microsoft?  It goes to show that antitrust needs to proceed carefully against unilateral conduct in markets that change so quickly (is anyone having an IBM case tingle?).  The landscape of 10 years ago in which Microsoft was dominant looks quite different today.

Amen to that post. With Google out there, is Microsoft-Yahoo really worth the trouble? (No.)

What is the plan for the new company? The Ballmer letter mentions the dreaded S-word (synergy). But are these supposed synergies real? Elsewhere, Steve Ballmer stated, "The Windows experience increasingly needs to embrace the Internet." Umm ... yeah. Microsoft hasn't tried that before. So what happens to all of the competing pieces of these companies?

So many questions. At the moment, however, this sounds more like Time-Warner/AOL 2.0 (or the "deal of the dinos") than Google.

UPDATE: Larry Ribstein wonders about synergies, too.

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