As Microsoft ends its acquisitive pursuit of Yahoo — for now, anyway — many questions linger. I’ll explore two of them here. The first is, should Microsoft have raised its bid to close the deal? The second is, should Yahoo have accepted Microsoft’s offer?
Let’s deal with the first question up front. I think it’s the most interesting one to address.
Regardless of what one might attach to Yahoo as reasonable valuation, Microsoft’s pursuit of the company never made sense to me. It only illustrated, along with Microsoft’s ridiculously overvalued stake in Facebook, that the Redmond software giant has no coherent strategic plan for Internet computing.
Microsoft made its bones as a major-league purveyor of packaged software, both operating systems and applications. Ever since the Internet came into its commercial prime, Microsoft has made repeated missteps in trying to harness its power. The problem, it seems, is that Microsoft always has viewed the Internet as a subset of its Windows and Office empires, rather than seeing it as a technological juggernaut that subsumes — or will eventually subsume — everything in its path.
Oh, sure, Microsoft executives make the right noises when it comes to talking about the primacy of Internet computing and software-as-services business models. At the end of the day, though, Microsoft owns huge franchises in packaged software, and that’s where the company earns its prodigious fortune.
In big companies, especially public ones, money talks, walks, and dominates all else. Even with firewalls between different business units and divisions, Microsoft’s top executives and its board members will invariably show deference to and favor the Windows and Office money spinners. It’s impossible for them to do otherwise. It would be against the laws of nature.
This explains Microsoft’s conundrum. It wants to milk the Windows and Office cows for as long as possible, but it recognizes the looming competitive threat that Google represents. The trouble is, recognizing the problem and resolving it are not the same thing. Microsoft is trying to time its transition to new platforms and business models, looking to ensure that it only makes the move at a juncture where service-based, web-delivered software will not deliver a premature death blow to its big-margin, shrink-wrapped franchises.
Timing patterns of this sort are difficult to pull off, not least of which because competitors, namely Google, are not under the same constraints. Google will aggressively seek to cannibalize Microsoft’s installed base at every opportunity, as expeditiously as possible, whereas Microsoft will eat its own only when it believes they are long past their best-before date — which, when you think about it, is an inherently unhealthy, not to mention risky, practice.
This explains Microsoft’s desultory, seemingly random forays into Internet computing. The Facebook investment, for example, appears capricious and uncharacteristic in retrospect. Who would have imagined Microsoft would invest so much money for so little tangible business value and equity? It was a roll of the dice, a spin of the wheel, on social networking’s hottest trendsetter; but, as a strategic play, it was madness, the first notable sign of early senility in Redmond.
Then came the acquisitive run at Yahoo. Microsoft has failed repeatedly at the portal game, and it wouldn’t have done anything with Yahoo that Yahoo cannot already do for itself. In fact, Yahoo probably could do better on its own, though its shareholders won’t see the instant financial gratification they would have derived from a Microsoft buyout.
You say, what about search and attendant advertising? Well, what of it? Combined, Microsoft and Yahoo still would have trailed Google by a large margin. Agreed, by getting rid of Yahoo as a search rival, Microsoft would have consolidated share gains, but the simple Yahoo+Microsoft market-share equation wouldn’t have come to pass. It rarely works that way in merger aftermaths, as the history of technology-industry mergers makes abundantly clear. Would Microsoft’s acquisition of Yahoo have been worth $47.5 billion? This isn’t 1999, so think carefully before you answer that question.
What else would Microsoft have gotten from Yahoo? Some market-share gains would have accrued from combining or consolidating instant-messaging and web-based email services. That would have been worth something, I suppose, but I didn’t see anything revolutionary in Microsoft’s post-merger plans that would have unlocked additional hidden value.
So, on the whole, no, I never understood Microsoft’s big-money pursuit of Yahoo. Any acquisition would have demanded that Microsoft spend lots of money (one way or the other) and make considerable effort at organizational assimilation and integration — at potentially great risk to its corporate culture and Yahoo’s — for modest business gains. The risks heavily outweighed the rewards. To think that Microsoft not only considered such a move but made it, well, that tells you all you need to know about how adrift the company is with its Internet strategy.
Microsoft should be grateful that the deal was rebuffed by Yahoo.
As for Yahoo, the story is more complicated. Now that Yahoo has seen off the Microsoft bid, its shareholders will pressure the company’s board and executive team to pursue an alternative that offers at least as much recompense as the Microsoft offer represented. That won’t be easy.
It will look at search advertising deals with Google, it will evaluate tie ups with AOL, and it will look at whether anything can be done with Rupert Murdoch’s News Corp. Now that Microsoft has withdrawn from the picture, however, those parties might be less inclined to cut deals with Yahoo, partly because the latter is no longer in mortal danger and partly because they don’t feel the same sense of urgency that Yahoo has to make a deal.
Who knows? If Yahoo falters, Microsoft might return with the same bid or a lower one. It might even seal the deal next time. I still contend that it would be the wrong move for Microsoft.
What should Microsoft be doing? I’ll deal with that question at a later date.