Why Microsoft+Yahoo Won't Fly.

Here's a case where I think everyone else has got it wrong. The media seems to be positioning Microsoft's hostile takeover of Yahoo as an admission on the part of Microsoft that they've lost their competitive edge. And Google, clearly worried, is making anti-trust noises, claiming that the proposed merger would destroy market competition. Both positions are utterly absurd, in my view.

First a little personal background. From 1997 to 2001, one of my big clients was Technology Business Research, a fairly successful market research firm. I was billed as a "contributing analyst" and my beat was Microsoft. Every quarter, I'd write a 35 page report on Microsoft's business model, marketing strategy, financial and so forth. Since then, I've written probably a dozen feature articles on Microsoft's business model and marketing practices. So I think I understand the company rather well, particularly when it comes to its corporate culture and history.

I'm also pretty savvy when it comes to mergers. I've both experienced -- from the front lines -- several major mergers between large computer companies, and was on the negotiating team for DEC when the company attempted a friendly acquisition of Lotus, prior to IBM's hostile takeover. I've written extensively about M&A events in the past, and recently completed a three feature package on M&A for BNET, two of which ("How to Plan a Merger" and "How to Negotiate a Merger") have already be posted. (The third "How to Execute a Merger" will appear later this quarter.)

So I'm pretty boned up on this stuff. Here's how I see this monumental deal:

The mainstream business media is wrong because they are forgetting Microsoft history. Microsoft has NEVER been adverse to M&A in order to grow market share. The reason that the company hasn't tried an M&A for a large company recently is the last time it tried (the acquisition of Intuit), the action was rulled anti-competitive. For the past decade, Microsoft has been so tied up with anti-trust lawsuits (the European one was active until late last year) that it would have been madness to try to acquire a big vendor in any major software sector.

In any case, the big software vendors that were acquirable (e.g. Seibel, Peoplesoft, BEA, etc.) had product sets that depended heavily upon systems integration and services for their business model. Microsoft executives rightly see those businesses as low-margin and hence unattractive. So the run at Yahoo isn't some move of desperation on Microsoft's part. It's exactly the kind of move that Microsoft has always wanted to take, but couldn't figure out a way to make palatable to government regulators.

Yahoo is a different case, because it's not primarily a software company and it's in a business where Microsoft doesn't command a monopolistic market share. In other words, while this might not be business as usual for Microsoft, it's business as Microsoft would always have liked it be. Hell, it's got to be driving Microsoft's executive team crazy having so much cash on hand. They've been dying to make some big buys for years. This is the first one that they believe will pass regulatory muster.

Google is making a mistake opposing the merger because the likelihood of the merger being successful -- assuming it goes through -- is microscopic. The problem is corporate culture. Mergers are hard to begin with. They're next to impossible when the cultures are incompatible. While Microsoft has always wanted to do strategic mergers, the company doesn't have the kind of track record with mergers that would suggest it would be able to execute a major merger well. Microsoft's "drink the coolaid" culture remains suspicious of outsiders and contemptuous towards other corporate cultures. At the same time, Yahoo is also a distinctive company with it's own esprit d'corps. Nobody there is going to want to work for a company that's clearly been the "enemy" since the Yahoo was first founded.

If the acquisition goes through, much of the top technical talent at Yahoo (and all of the top management talent) will jump ship, leaving Microsoft with an empty shell. And even if the top talent stays on board, there's nothing that Microsoft can add to the mix -- other than money -- that's likely to slow Yahoo's market share decline relative to Google. Consider; Microsoft has been pumping money into MSN for a decade and getting its butt kicked. Two failing web properties don't add up to a successful one. There's no reason to believe that the combination of MSN and Yahoo will be any stronger than the two of them have been apart.

So I've concluded that the proposed merger isn't a strategic departure for Microsoft, but a misconceived adventure that's probably going to fail. In fact, the turmoil that the merger is likely to produce inside MSN and Yahoo will probably hasten the decline of both. And that's to the advantage of Google. If they're as smart as they think they are, they'll keep their mouths shut and let the merger go through.

There is only ONE thing that has a ghost of a chance of making the deal work. If Microsoft can manage -- well prior to the acquisition going final -- to win the allegiance of Yahoo's sales force, they might be able to get something useful out of the deal. Unlike the other stuff inside Yahoo (software development, marketing, finance, etc.), selling ads for one web property is pretty much like selling ads for another. For Microsoft, the real value in Yahoo is in the contacts that their sales force has established.

However, I doubt whether Microsoft's executive team will offer the lowly sales reps the kind of bonuses and money that would make them champ at the bit to come work for Microsoft. (For one thing, Microsoft would have to raise salaries and commissions at MSN, which probably isnt' going to happen.) What's much more likely is an aggressive post-merger campaign to keep Yahoo managers in place. However, the mere fact that Microsoft is doing a hostile takeover will alienate the top technical and managerial talent, and Microsoft will end up with the plug-and-play bureaucrats who don't see anywhere else to go. And that's not much to get for $45 billion.

Time will tell, but I think that the Microsoft-Yahoo merger -- if it goes through -- will rank right up there with Time Warner's acquisition of America Online as one of the most overhyped mistakes in American high tech.

So there you have it. Happy to argue with anyone who disagrees with me, of course.