Merrill Lynch: Microsoft Acquisition of Yahoo Would Be “Positive”

Merrill Lynch market analyst Justin Post issued a report today, opining that it is increasingly likely Microsoft will make a large acquisition, with Yahoo cited as attractive prey.

Here’s an excerpt from a Reuters story regarding the Merrill Lynch report:

“Microsoft has been late to the Internet and, given significant financial investment that has affected Microsoft’s stock price, the new management team will be under heightened pressure to effectively compete with the Internet leaders,” Merrill Lynch’s Post wrote in the report.

While Post said Microsoft’s $34 billion cash balance makes a case for more aggressive share buybacks or a higher dividend, “the possible acquisition of Yahoo! would be a strategic positive, in our view.”

“A potential acquisition of Yahoo! would reduce the risks and the time horizon for Microsoft to drive market share and profitability of its MSN business unit relative to its internal efforts,” he said.

The theory here is that Microsoft is scared and on the run, losing ground to the relentless and seemingly limitless market incursions of Google, which has solidified its stranglehold on Internet search and is hungrily taking aim at enterprise search and other business-oriented offerings that could further erode Microsoft’s dual franchises of Windows and Office. Apparently, even Microsoft’s own employees prefer Google’s search tools over Microsoft’s own technologies.

It might be true that Microsoft is feeling unprecedented heat and pressure from its latest nemesis. Microsoft stock has fallen more than 10 percent during the past year, and shareholder meetings are no longer orgies of self-congratulation where Microsoft executives and stock punters exchange plaudits on their respective business and investment acumen.

Still, I don’t agree with Merrill that an acquisition of Yahoo or eBay would be a positive development for Microsoft. In fact, I believe it could precipitate chronic decline for the industry titan.

What many market analysts repeatedly fail to take into account when they tout massive mergers and acquisitions are the cultural and human factors. Human beings are complex creatures, and their motivations, in business as well as in their personal lives, both are rational and irrational. That makes larger, merger-related corporate integration and assimilation especially difficult.

The history of the information-technology industry demonstrates that the probability that a merger or acquisition will produce a compelling ROI is inversely proportionate to the size of the company acquired. The bigger the company acquired, the more likely that the merger will fall. There are exceptions to the rule, of course, but it should be obvious that smaller combinations present less risk and more strategic upside than big ones.

Smaller companies are easy to digest, relatively simple to assimilate, and bring less product and technology overlap. More important, internecine warfare between the acquiring company and its new colleagues. The us-versus-them mentality can linger after acquisitions, and distrust between the acquirers and acquired can grow when the geographic distances between the two require air travel rather than highway commutes.

Big mergers are hard to execute well. Microsoft has not shown that is capable of pulling one off. Moreover, by all accounts, the cultures at Microsoft and Yahoo are different enough to present serious integration challenges. No, purchasing Yahoo is not the silver bullet that will allow Microsoft to slay the software-as-services threat to its core franchises that Google increasingly represents.

Microsoft is having more than enough difficulty getting its own house in order. It’s not up to the task of pulling together two large companies that already have a long history of competition.


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