Bid for Power

Microsoft Makes $44.6 billion Dollar Offer for Yahoo!
by: Jerry Liao

In one of my TV interviews early this year, one the things I said that will happen this 2008 is the possibility of Microsoft buying Yahoo. Both Microsoft and Yahoo wants to win the web battle, but is face with a very strong adversary – GOOGLE. So if they can’t beat Google by themselves, why not combine the strength of both and let’s see what is going to happen. We’ll, we don’t really have to wait that long, because just last week Microsoft says it has offered to buy Internet search engine Yahoo for $44.6 billion.

In a letter sent by Microsoft President Steve Balmer to Yahoo!’s Board of Directors, Balmer cited the following reasons why Microsoft is interested in acquiring Yahoo!:

– 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 are greatly enhanced.

The Yahoo! Board said they are undertaking a deliberate review process. They’re going to take time to thoroughly evaluate the proposal in the context of Yahoo!’s strategic plans. This will include evaluating all of the Company’s strategic alternatives – including maintaining Yahoo! as an independent company. That process will take some time, but the Board will ultimately pursue the option that it believes can best maximize value for our shareholders. Yahoo added a review process like this is fluid, and it can take quite a bit of time.

The rule of the trade is never say Yes on the first offer. While Yahoo didn’t say no, a reply of reviewing the offer is like sending a message to Microsoft – can you sweeten the deal a little bit more? Yahoo founder and Chief Executive Officer Jerry Yang may initially reject the offer and try to resurrect the company from the grave but we have to remember that it is not solely Yang’s call, unless Yang can show some miracle, Yahoo shareholders will put pressure on Yahoo’s board to accept Microsoft’s offer.

Now, why do I think Yahoo would most likely to say YES to the offer? First, Yahoo chief executive officer Terry Semel stepped down as chairman of the company’s board of executives. Second, Yahoo recently announced that it was laying off 1,000 employees as part of a cost-cutting measure. Third, Yahoo is losing its ground in the search engine market, or should I say losing ground in the entire web services market.

The next question is why is Microsoft interested in Yahoo!? Microsoft is still looking for that right formula to capture the web leadership from Google. Microsoft bought online advertising aQuantitive, and also invested in Facebook. And Microsoft thought having a Micro-Hoo or Ya-Soft might do the trick for them.

So will it work? Will the combination of Microsoft and Yahoo give Google a run for their money? Maybe yes, maybe no. Let’s check the facts.

Google owns 60%-70% share of the search market which would leave Microsoft and Yahoo a 30% share combined. In as far as service offerings are concerned, they just have too much similarity – email, search, instant messaging, music and others.

Let’s look at the bright side, Microsoft and Yahoo has more email users combined. Yahoo has Yahoo 360 and Yahoo Answers while Microsoft has Windows Live Spaces for social networking and a gaming platform in Xbox 360. Microsoft and Yahoo together owns nearly 30% of display advertising market while Google owns less than 2%.

This is my take on this issue if in case Yahoo said yes to Microsoft’s offer. Yahoo and Microsoft together will be more competitive to Google than being separate. I would also suggest that both companies retain each product and its identity. Throwing one or the other will be a disaster. Make them appear as if they are still different or competing products but make the underlying technology identical. This will allow users to choose and build their own community and thus will allow advertisers to target their market. Make it a three-way battle still than just two.

Lastly, Microsoft and Yahoo combined needs a strong leader. Steve Balmer definitely is not a good choice since his more of product oriented. The web is totally a different dimension and market altogether. A strong leader and a unique and innovative products will be key to knock Google off its throne.

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