Yahoo: Finally Catches a Bid. Deal is Done.

Yahoo is finally catching a bid. This time, of course, it’s coming from Microsoft, rather than investors enamored with the struggling search/content/advertising company. Early this morning The Company That Bill Built announced an unsolicited $44.6-billion deal for Yahoo, which is the sort of thing, as I said here earlier this week, the only practical upside for YHOO stock right now.

Okay, but is it a good idea? The honest answer is Yes, but investors shouldn’t expect much. Tying two share-losing rocks together — both companies are losing marketshare in search and in search-related advertising — won’t make them fly. The trouble, of course, is that MicroHoo would have much more scale, but a size problem is not why the separate companies are struggling against Google. Nor is it about innovation, which is what Microsoft’ Ballmer said on the call, where he lauded Microsoft Labs’ research prowess, and double-lauding how lovely it would be to have the two organization’s propereller-heads under the same roof. Wrong again.

The answer is that Google is dominating a tipping market — search and online advertising — and consolidation among competitors is about the only rational response. A combined Yahoo/Microsoft would become a truly material piece of the ad market, in excess of 40%, which is enough for it to finally offer Google a credible threat.

With respect to the price, no-one else is likely to emerge. Regardless of whether Microsoft is getting Yahoo for a great price, as some will say, there is no credible counter-bidder out there, especially not Google. At the same time, private equity bidders, who had been mulling Yahoo bids, will be put off by Microsoft’s cash horde, and its strategic intent, which would in any case keep a Microsoft bid out of reach of financially-driven PE pricing.

My take: This deal will happen, and it will happen at this price. Yahoo has no choice, because shareholders will beat it blue if Jerry, et al. don’t take the money. That said, it doesn’t make me any more optimistic about the combined company’s future in search & online advertising — Microsoft still thinks it’s about research spending, which I have refused here before — so forgive me if I don’t expect Google’s share price to fall through the floor this morning (more than it has from missing earnings last night).

Some questions I’d still like answered:

  • What was Yang’s reaction last night to Ballmer’s call with the offer?
  • What are the specific cost-synergy plans? And if any more smoke-blowing goes on about combining two great research organizations I’m going to hurl.
  • What are the integration plans? The nightmare non-synergy scenario is preserving both company’s advertising and search platforms.

Feel free to add others.

Related posts:

  1. Yahoo: Google? Never Heard of It
  2. Yahoo, Google, and the Search Satisfaction Myth
  3. Why Doesn’t Yahoo Use Yahoo?
  4. The Shorter Barron’s on Yahoo
  5. Yahoo: Estimating the Break-Up Value

Comments

  1. I agree, Paul. This one smacks of desperation on both sides — a shotgun wedding with both sides holding a shotgun. But roping two sick dogs together isn’t going to beat one healthy dog.

  2. kamla bhatt says:

    google is dominant in the us and parts of europe but has not made any significant introads in countries like japan, korea, japan or russia or in many of the emerging economies. on the other hand, both microsoft and yahoo have a pretty significant presence in many of these countries. yahoo has a minority stake in baidu of china and yahoo is pretty big in japan. also, both yahoo! and microsoft are invested pretty heavily in R&D for emerging markets, and are working in increasing their market share in these non-US markets.
    i suspect if this merger goes through microhoo will be big in non-US markets and present a significant challenge to google. factor in the mobile phone angle and you will how microsoft and yahoo are ahead of google in this area too.
    it will be very intresting to see how this pans out.
    kamla bhatt

  3. Paul, my comment earlier: Studebaker buys Edsel.

  4. Lee D says:

    I love the repeated use of “roping together” analogies: rocks, sick dogs, etc. The one I used on my blog was “tying two pigeons together and trying to make an eagle.”
    I think this is a GREAT deal for bargain hunters who greedily snarfed up YHOO last week while shareholders were being fearful, but for few others.

  5. I think you’re right, this IS going to happen. The most important question for me is how the companies are going to merge the brands. Will they keep them separate? (seems mad)
    If they integrate them, how on earth do merge one of the biggest names in computers with one of the biggest names in Internet? The cultures are so different.
    In addition the brands are even more different. Whoever has the job of trying to bring these together has one of the biggest tasks in the history of the Internet. I also doubt they’ll struggle to get close the power of the (now even bigger) big G.
    Interesting times…

  6. michael s. says:

    First lets address the fact that Y! management has destroyed tens of billions of dollars in shareholder value over the past 2 years and I have a very hard time believing this is all Terry’s fault. The management team of Yahoo! should be ousted by Microsoft the day the deal closes — if not sooner. This is not a management team who has discipline or a deep enough understanding of how to build innovative software services/products. As a Yahoo! shareholder this has been a very depressing time watching an inexperienced & largely inept management team destroy a valuable franchise.
    Integration strategy: “Kill and Kill Quickly”
    The absolute worst thing is for engineering/product wars to break out that simply prolong the death of the many overlapping products.
    Media & Community–> One singe brand around Y!
    *Y! Finance vs. MSN Money. (Kill MSN Money)
    *Y! Sports vs. MSN Sports (Kill MSN Sports)
    *Y! Homepage vs. MSN (kill MSN homepage)
    Communication & Productivity Services –> focus around Live
    *Keep MSN Messenger (Kill Y! Messenger) and migrate users.
    *Keep Y!Mail Suite back-end and interface which is superior to Hotmail but re-brand Live Mail (you will take short-term hit for this)
    *Integrate hosted mail suite with desktop mail services — Windows Live…
    Search:
    *Kill Y! Search and focus development on MSN Search — MSN Search has better momentum and some of the technology is newer then Y! Search which is largely based on Inktomi technology from 7 or 8 yrs. back.
    Ad Systems
    *Key factor here needs to be reduce customer friction –so since Y! has lots more advertisers that seems like the systems you would keep.

  7. Jay says:

    I agree with Michael S. I would go so far as to say that MS keeps the Yahoo brand and simply migrates all of its Live services over to Yahoo’s brand. Yahoo is the face, MS is the technology. The interesting part is how MS manages all the Open Source angles Yahoo has going on. The best of which is Zimbra.
    Windows Live Search and Maps are both top notch technologies. I don’t know much about MS Ad Center, but I can only assume WSJ had a tip off that all this was about to go down with their big announcement of exclusive ad search via MS on Thursday. The combined ad generation revenue from the single will be a very strong competitor to Google with MS’ Windows and Office cash cows providing all the R&D money.
    Look for Google and Apple to announce a deal within 12 months of MS closing the Yahoo deal.

  8. miro says:

    This is high stakes poker – so
    who else has the desire and intent to play/stay at this table?
    Google? regulators wont allow it to buy Yahoo
    MySpace – Murdoch has pockets and the desire for the space – but it doesn’t yield enough critical mass
    IMO Microsoft is the only logical choice

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