Why Microsoft should never even think of acquiring Yahoo!
Rumors had started to get tired a couple years ago with Bill Gates’s incompatibility stance explaining why Microsoft and Yahoo! would never get married: Microsoft = a software company vs. Yahoo! = a media company. A stance repeated by MsRay Ozzie: “Although Yahoo also has significant communications assets that combine software and services, they are more of a media company and–with the notable exception of their advertising platform–they seem to be utilizing their platform capabilities largely as an internal asset.” (source: CNet News) in mid-2005.
Since then however, Yahoo! has changed a good deal – changing not necessarily meaning improving. But from the media and content giant it has been, it looks as if Yahoo! has been scanning what Microsoft had to say about it and evolved in order to fit with Microsoft’s future acquisition needs. Indeed, Yahoo! has truly entered the Web 2.0 era the day it released its newly designed homepage Yahoo.com. Now, a drag-and-drop interface (looking alike Windows Live) allows you to tailor your own webpage.
But before we delve further into the analysis, let’s go back to recent history: Yahoo! is the combination of the initial unefficient Yahoo! search engine, algorithmic search Inktomi (acquired in December 2002 for a mere US$ 235m), e-advertising & paid listings platform Overture (acquired for US$ 1,6m in July 2003) which had acquired a few months before that transaction both search engine Altavista (for US$ 140m) and Norwegian company FAST operating a crawler, namely AllTheWeb – used for instance by Lycos. When it comes to Microsoft, I remember its Vice President Jim Allchin talking back in early 2003 about projects of tight integration of search capabilities into Longhorn (better known as Vista nowadays), using the example of “Implicit Query” – an automatic retriever of multimedia content and link into desktop applications. What’s more, the MSN portal was at that time heavily relying on Yahoo!-owned Inktomi & Overture technologies – a competitive situation which made the financial community buzz around the idea of a merger leading MSFT to integrate with its suppliers and hence improve its operating margin. A merger at this point would have made sense, I guess, but Microsoft made a smarter, cheaper move ‘acquiring’ talents from Overture such as its CTO Paul Ryan to head Microsoft’s search department instead of buying the entire Yahoo!.
So, where do we stand?
Search: Google is brightly leading the search technology landscape. I can’t see serious competitors coming, except Google itself. To make my point, I should mention the very low switching barriers in the search business: typing in www.exalead.com instead of www.google.com ‘costs’ the same amount of time for a visitor (remember, people switched from Hotbot, Altavista and yahoo! to Google in a wink back in 2000).
Advertising: if I understand well, Microsoft has recently released its Adcenter to compete against Google & Yahoo!. The market is keen on finding alternatives to Google Adwords and for once welcomes Microsoft’s move. The pie is moreover growing at a faster rate than Yahoo! does: my call is that Microsoft shouldn’t find it too hard to take over Yahoo! in terms in the adwords market.
As I said recently, Yahoo! relies on 3 major assets: Flickr + Del.ici.ous, the leading position of Yahoo! Messenger in the US, and its widely used e-mail thin client. Apart from that, Yahoo! has no clear strategy, doesn’t know how to use its cash, finds it everyday harder to recruit the best people, has lost the trust of financial analysts, has no technological competitive advantage to offer any would-be acquiror. To wind up, Yahoo!’s value comes from its traffic derived from the 2 / 3 top websites it owns. And since Microsoft’s business model is not quite related to the traffic generated by its web platforms…
As far as Microsoft’s concerned, and to go a bit further, Yahoo! is too big of a pick to be considered seriously. On the one hand, all academic research published recently tend to prove that big corporations make good use of the M&A value creation lever when focusing on making small & tech-intensive companies with a top-of-class team – like CISCO has been doing for ages. Mergers of equals foster tensions, pressure, inward politicking rather than outward client care and competitor watch – which is why strategy consultants often repeat that 2/3 of M&A lead to failures. On the other hand, top Microsoft decision-makers and bloggers seem to have perfectly integrated the rationale of acquiring small and leveraging on technology rather than purchasing an installed customer base. One application example: PhotoSync was a tiny company company when acquired by Microsoft. Not convinced yet? Take a look at 3 clarifying posts from Microsoftees, blogging on the acquisition topic:
- Don Dodge’s post on MSFT’s acquisition strategy;
- Daniel Lewin’s post on Microsoft’s acquisitions in 2006;
- For French speakers only, Sur la Stratégie d’ Acquisition de Microsoft on Julien Codorniou’s weblog.
To wind up, and repeat myself, Yahoo! isn’t an adequate acquisition target for Microsoft: too big, too burdened, too different. As a petty Microsoft stockholder, an acquisition, despite Yahoo! being dirt cheap recently (why would you give something mediocre a big price?), would keep me away of MSFT for a while such as the acquisition of Skype (a great company that just doesn’t fit into eBay’s portfolio) made me stay away from eBay until now.
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Business strategy, Cisco, Finance, Google, Internet, MNC, Microsoft, Silicon Valley, Software, USA, Venture Capital, Video, marketing, user-generated content
Jeremy,
I do not believe that switching costs are so low in the case of Google. Instead of a technical explanation i would just say that the market capitalisation of this company, which is rather mono-product, is extremely high with a cash flow profile which looks like an Exp function.
Seems contradictory.
Hey Alexandre,
Think twice, Google is not so mono-product: it operates many online software platforms to generate traffic & clicks (Gmail, YouTube, Google Maps, Google Earth, Google Search, Google Pages, Google Spreadsheets, etc.) and, true, monetizes this traffic through advertising only. Still, Google is far from being exclusively search-focused.
On the switching cost thing: could you please elaborate on your stance? I’ve thought about it and I can’t think of any business with lower switching barriers than a search engine. All you have to do to switch to a competitor is to type in a different address. In the real world, you’d have to drive at least 10 miles to drive from a hypermarket to another.