Saturday, February 2, 2008

Mircosoft's Bid for Yahoo

Yesterday, the ruffians from Redmond made an unsolicited offer to purchase the outstanding shares of Yahoo for $44 billion and some change. That's a substantial transaction that begs some questions. Why Yahoo? Why now? And: What does this mean?

As any keen observer of the technology sector knows, Yahoo has fallen on hard times. There've been plenty of stories about the layoffs and declining profits. Apologetic CEO Jerry Yang has already acknowledged the situation, expressed his contrition and promised change. The management team has a plan, we've been assured, and they're working it. I really don't think they saw this coming.

Predators strike at any sign of weakness. That's a fundamental rule of business. And Yahoo is in a weakened state, staggering to stay in the race. The company does, however, have substantial assets including brand awarness, a sizeable and loyal user base, all the web 2.0 bits-and-pieces ready to roll, an advertising delivery platform and a working infrastructure. That's why they are properly viewed as an acquisition target. But the bottom line is Microsoft needs Yahoo in the worst way. We're talking long-term survival needs. More on that later.

Why now? Steven Davidoff, the "Deal Professor" at the NY Times business section really put it best in this article. Suffice it to say that the nuance of corporate governance combined with Yahoo's own calendar to dictate the timing of the offer. If you're interested in that sort of thing, Davidoff has really done his research and parses it very well. Worth the read.

Now for the really fun question. What does this mean? From my point of view, and I have history in this area, this is a desperate move on Microsoft's part. Think about it. They may not be betting the farm, but they're sure as hell commiting a substantial sum to this effort. The offer, by the way, was not very gracefully presented. More like: "I'd like to make you an offer you can't refuse." But I digress. Pundits have been opining about the battle shaping up between Microsoft (the company that has crashed more computers than any other in history) and Google. Well, it has now become abundantly clear that in Steve Balmer's opinion Microsoft requires Yahoo to remain competitive. Let that sink in. It is quite a reveal.

Those of us who have competed with Microsoft in previous lives always called Balmer "The Hammer." He had that nickname when Tom Delay was still a pest control operator. Gates was always the visionary, I remember him rocking as he held-forth at Spencer Katt parties, Steve was always the heavy.

Balmer is a big guy, and he walks really fast - often making his companions scurry to keep up. I must confess that after being in the trenches opposite the ruffians from Redmond for almost a decade in the competitive market of the 80's and 90's, I find the prospect of Steve and Microsoft running to keep up with Goolge absolutely delicious. It's a race I believe the software behemoth will ultimately lose. Ironically, breaking Microsoft up into separate, competing companies - what the market demanded and did not get early on - would have yielded several standalone firms much better able to compete in today's technology space. So Microsoft's belligerance and organizational resistance to disruptive change have turned out to be catastrophic business decisions.

Now, Microsoft finds itself behind the curve. Producing shrink-wrapped and bundled proprietary software for an increasingly web-based, open-source world. Something had to change. And quickly at that, or the company risked being assigned to the junk heap of irrelevant has-beens. That can happen fast in the technology sector. IDG News Service's Elizabeth Montalbano correctly asks if Yahoo is viewed by Balmer as a "...mere front-end for Microsoft hosted apps?" in this article. Her analysis is point-on. A comment on her article notes that if this is the reason for the acquisition, it won't work - as Google is already miles ahead in online technologies. From The Author's point of view, that sums it up well. Game over.

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