Microsoft searches out new battlefronts

There are many reasons to suppose that Microsoft’s audacious and unsolicited bid to buy Internet portal company Yahoo will end badly. Not all of them are valid.

Critics of the proposed deal, of which there are many, have been quick to point out the flaws. Firstly, large technology mergers have a poor track record of delivering shareholder value. At $44.6 billion, this would be the largest tech takeover since AOL and Time Warner came together. (Ironically, those companies announced their decoupling in February, after seven tempestuous years.)

Secondly, the difficulties of integrating the two companies look immense; a culture clash seems highly likely. As Forrester Research analyst Charlene Li notes, “Yahoo is famously independent and as an organisation has looked at Microsoft with disdain. We believe that they will do everything possible to avoid being acquired.”

Elsewhere, informed observers have balked at the price Microsoft is offering for Yahoo: at 62% above Yahoo’s pre-announcement stock price, the premium is simply too high for an ailing company like Yahoo, they say, and as an opening bid it is only likely to rise as negotiations get under way. It is a “full and rather silly” price, suggests David Bradshaw, an analyst with Ovum.

For yet others, the acquisition is too little, too late. The history of business provides precious few instances of a market number two and three combining to unseat the market leader. And Microsoft and Yahoo are firmly behind Google in terms of Internet search and online advertising. According to Internet tracking house comScore, Yahoo handled 2.2 billion search queries in the US during December 2007 (down 4% year on year), compared to Google’s 5.6 billion (up 30%). Behind them, Microsoft dealt with 940 million, an 8% increase.

Business strategists have also dismissed the bid as a defensive move from Microsoft: it desperately wants to defend its Office and Windows cash cows against cloud computing and the type of Internet-delivered services favoured by Google. These represent a very real threat to the Microsoft business model in the medium to long term. Fortune favours the brave, not the defensive, notes former securities analyst and notorious dot-com bubble cheerleader Henry Blodget, on his Silicon Alley blog. “At Google, every exciting new idea that undermines Microsoft’s core business will be rushed into production. At Microsoft, every exciting new idea that undermines Google’s core business will be killed.”

Given the possibility of a white knight riding to Yahoo’s aid, or competition regulators raising objections, the rationale for the deal might begin to look shaky. Competition rules are likely to prevent Google from mounting a full-on rescue package, but its CEO, Eric Schmidt, is known to have called his Yahoo counterpart to offer assistance.

Meanwhile, the likelihood of a drawn-out process may prove a huge distraction to both Microsoft and Yahoo, with a high likelihood that other acquisition and technology innovations will be parked in the intervening time.

But the naysayers are missing the point, suggests Andrew Frank, an analyst at IT advisory group Gartner. Given the threat that Google poses to its business, doing nothing is not an option. “Microsoft must take the fight to Google’s neighbourhood,” he suggests.

While Frank acknowledges that Microsoft is “unlikely” to overtake Google in online search and advertising, the potential market is large enough that it may believe the revenue streams will be sufficient to make the deal more than worthwhile.

Much is made of Google’s lead in Internet search, but this is still a dynamic market in which leadership today does not guarantee leadership tomorrow. This is where Microsoft CEO Steve Ballmer sees the strongest justification for the deal. While he accepts that any large integration process carries certain elements of risks, the combination of Microsoft’s engineering team with that of Yahoo offers the best prospect of challenging Google. “Sure, we could have hired engineers and kept hiring engineers – we’re very good at that. But at the same time the market continues to grow and the leader continues to consolidate its position. And there is nothing quite like having the chance to put together two larger sophisticated R&D organisations,” he says.

In early January 2008, Microsoft also agreed to acquire enterprise search company Fast Search & Transfer (FAST) for $1.2 billion. The acquisition provides Microsoft with high-end enterprise search tools, suited to combing through vast repositories of company information in a manner that Google’s Internet search cannot match. The combination of Microsoft’s SharePoint server technology with its own Internet search, that of Yahoo and the FAST technology provides an unparalleled and broad search portfolio. That must make other enterprise search companies – most notably Autonomy – a target for the likes of Google, IBM and Oracle.

Henry Catchpole

Henry Catchpole runs Inform Direct, a company records management software company which simplifies the process of dealing with Companies House. The business was set up in 2013.

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