Experts say difficulties of acquisition or merger may outweigh gains
Microsoft and Yahoo are at it again – talking that is – about a merger that would create a formidable foe to battle common competitor Google.
The two companies tried and failed last year to hammer out a merger or acquisition. Both companies were mum Friday on the subject, but the rumor mill and the stock market are heating up. In morning trading Yahoo stock was up 15%, giving the company a $43 billion market cap.
Read the latest speculation here and the Google perspective here.
Experts say with those numbers it is very unlikely Microsoft would write one big check to acquire Yahoo and that a merger would be the more likely scenario.
But even a merger, experts say, seems unlikely when factoring in that it would require the creation of a new company and a blending of talent and leadership that would take two to three years of disruption while Google was free to work without such distractions.
But given Google’s April 13 announcement of an agreement to acquire DoubleClick, Microsoft and Yahoo were forced to compare notes and talk strategy, experts agree.
Google’s move on DoubleClick, a company Microsoft was also courting, gave it something it did not have before – a business around display advertising and a chance to gain a greater foothold in that market, according to CEO Eric Schmidt.
Response was immediate from Yahoo, which two weeks after Google’s record $3.1 billion buy, made a $680 million counter move with the pending acquisition of Real Media, which operates an “exchange” where advertisers buy space on Web sites.
But the blockbuster would be the rumored Microsoft/Yahoo merger that could create a giant that would dwarf Google in terms of display advertising power and present a formidable opponent on the search front.
Despite that outcome, the merger talk spawns myriad questions.
“My feeling is that a merger makes lots of sense on paper, but the reality of pulling off a successful merger is really, really tough to do,” says Charlene Li, an analyst with Forrester Research. But she concludes, you would have “two advertising powerhouses that can do a lot of interesting things and really keep Google at bay.”
Li said Microsoft and Yahoo have a lot of overlap in online audience, somewhere in the neighborhood of 75 million unique visitors. Despite the overlap, if the two combine all that data into one database and one behavior engine it could be very powerful.
“It is not just the individual page views that matter anymore, it is what you do with those page views,” Li says.
“If I can target and understand that someone has been looking at cars and then they go and do a search on cars that is extremely valuable.” Li says that provides information about what kinds of cars the user is looking at and provides all sorts of opportunities to provide advertising against that data. “That’s something Google does not have, even with DoubleClick,” she says.
Other upshots of any such merger would include Microsoft’s wealth of engineering talent and Web services API expertise and Yahoo’s expertise in social networking.
“Yahoo’s acquisitions of Flickr and del.icio.us and emphasis on social search and media really position it well for new challenges,” Li says.
But with all that going for a merger, Li does not think it will happen given what it would take to combine the two companies.
“Consolidation of brands is very difficult. Microsoft can’t even figure out how to reconcile MSN and Windows Live,” Li says.
“The two would have to forge a new company out of this, new leadership; can they hang on to all the great talent? And frankly, the main reason they are doing this is to defend against Google and Google is not going to have any of these distractions.”
Li says a partnership would be more likely than a full-blown merger in that it would allow the two to realize quick benefits in cooperating against Google by swapping technology, advertisers and advertising platforms.
“In a merger, there are no short-term wins. Can they really think that strategically, that far in advance? A public company with bottom line commitments? That is hard to pull off and to have that kind of vision.”
Others agree that a merger seems a more drastic step then needs to be taken.
“I don’t think this is desperation,” says Peter O’Kelly, an analyst with the Burton Group. “It is two very smart, long-term view companies looking at it saying we have this issue with Google and the time to take action on this is not going to get better if Google is successful and we have to look at all the permutations.”
O’Kelly also went out on a limb saying he is starting to see patterns between Google and the late Internet darling Netscape, which seemed to compete with everyone in its heyday.
“Ten years ago, Netscape either deliberately or inadvertently started to compete with everyone simultaneously and they forced a bunch of sequences of actions in the ecosystem around them that eventually led to their demise.”
O’Kelly said you won’t see that next week with Google, “but Google is at the scale and has enough market momentum behind it that their competitors are going to respond. [Microsoft/Yahoo] is stimulus response at the macro economic level.”
Some experts feel that Microsoft’s troubles in the online search area will force its hand with Yahoo. Allan Krans, an analyst with research firm Technology Business Research, believes the weakness of Microsoft’s online business, combined with the growing strength of Google, may convince Microsoft to purchase Yahoo.
“Up to this point, Microsoft has employed a go-it-alone strategy in the online search market, which has not produced any significant results,” Krans says. “Microsoft remains committed to investing in its online strategy, but the internal development route is likely to take years before any substantial positive impact.”
Krans says an acquisition of Yahoo would provide an immediate boost to all aspects of Microsoft’s online strategy, but also speaks to its future goals outlined this week at its MIX conference for building a platform of software and services.
“Although improved online advertising revenue may play a role in the ongoing acquisition talks with Yahoo, TBR believes Microsoft’s initiative to transition from a desktop-centric software model to a Internet-enabled model could be the driver that justifies the transaction.,” Krans says.
