The Microsoft-Yahoo Marriage

Microsoft has launched an unsolicited hostile bid for Yahoo! at the price of USD 44.6 BILLION. They have the intention to take on the world’s No. 1 internet search leader, Google, which is by far the one with the largest market share of internet searches and is making much more revenue in online advertising than Yahoo’s and Microsoft’s revenues combined. This is a classic case of the No. 2 and No. 3 teaming up to compete with the No. 1. If successful, this deal would eventually mean that the world of search would be handled by a duopoly, Google and Microsoft. As David Drummond, Senior Vice President, Corporate Development and Chief Legal Officer of Google puts it in the Google Blog:

So Microsoft’s hostile bid for Yahoo! raises troubling questions. This is about more than simply a financial transaction, one company taking over another. It’s about preserving the underlying principles of the Internet: openness and innovation.

Could Microsoft now attempt to exert the same sort of inappropriate and illegal influence over the Internet that it did with the PC? While the Internet rewards competitive innovation, Microsoft has frequently sought to establish proprietary monopolies — and then leverage its dominance into new, adjacent markets.

Indeed, Microsoft, the Windows OS and software giant is witnessing a boom in the growth of companies such as Google and Apple, which now directly threaten its very existence. It seems to be switching strategies to play catch-up with the online advertising leaders by offering a bid to swallow Yahoo!

Yahoo!
Brian McGuiness/Agence France-Presse — Getty Images

Reactions gathered about this bid go both ways. Some say that if Microsoft and Yahoo join hands, the world benefits from having a more sizable competitor for Google, thus enabling users to enjoy the benefits of healthy competition that churns out better innovation. Perhaps this might be so, but Google’s search technology is far more superior to that of MSN’s or Yahoo!’s. Proof? Just use it yourself. It has been ages since I have used a Yahoo! search engine or MSN Search. When I did, Google inevitably gives me more quality results for my searches. So the Microsoft-Yahoo company must come up with an even better technology to rival Google’s PageRank algorithms.

Microsoft

Here’s what Steven Ballmer, CEO of Microsoft Corporation wrote in a letter to the board of directors of Yahoo!:

Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers, and publishers. Synergies of this combination fall into four areas:

— Scale economics: This combination enables synergies related to scale economics of the advertising platform where today there is only one competitor at scale. This includes synergies across both search and non-search related advertising that will strengthen the value proposition to both advertisers and publishers. Additionally, the combination allows us to consolidate capital spending.

– Expanded R&D capacity: The combined talent of our engineering resources can be focused on R&D priorities such as a single search index and single advertising platform. Together we can unleash new levels of innovation, delivering enhanced user experiences, breakthroughs in search, and new advertising platform capabilities. Many of these breakthroughs are a function of an engineering scale that today neither of our companies has on its own.

– Operational efficiencies: Eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity.

— Emerging user experiences: Our combined ability to focus engineering resources that drive innovation in emerging scenarios such as video, mobile services, online commerce, social media, and social platforms is greatly enhanced.

However, another concern is the integration of two behemoths with its different set of cultures and work-ethics. Also, Yahoo! and Microsoft are now bleeding talent to many other start-ups such as Facebook, Mozilla and many younger start-ups. By the time the acquisition is over, the talents that drove both Yahoo! and Microsoft may already be drained. Many of the engineers there have left or are talking about leaving.

In the meantime, Google has came out publicly against the bid by Microsoft, referring the offer as a threat to competition.

A NY Times article reports:

Privately, Google, seeing the potential deal as a direct attack, went much further. Its chief executive, Eric E. Schmidt, placed a call to Yahoo’s chief, Jerry Yang, offering the company’s help in fending off Microsoft, possibly in the form of a partnership between the companies, people briefed on the call said.

Google’s lobbyists in Washington have also begun plotting how it might present a case against the transaction to lawmakers, people briefed on the company’s plans said. Google could benefit by simply prolonging a regulatory review until after the next president takes office.

What would happen next?