The truly pedantic among us will notice that the above headline is loaded with pre-supposition. I intentionally did not write “MSFT offers…” or “MSFT intends..” for the simple reason that this is one of those rare deals that must happen — for both parties. Google continues to grow market share and that growth continues to come directly at the expense of YHOO and MSFT. Furthermore, for Jerry Yang to spurn such an offer (at a 62% premium to the slumping YHOO stock, mind you) would all but guarantee a storming of the Bastille by irate shareholders. Put simply, Yahoo is out of options and must take the Microsoft offer. Yang’s much bally-hooed return last summer as CEO has been less than stellar and the turnaround he put in place has, for all intents and purposes, been a flop. The company is floundering, the stock closed yesterday at a four-year low, and the tech giant’s very own raison d’etre is now clearly being called into question in the shadow of the Google juggernaut.
There will be endless navel gazing in the coming days and weeks on the merits, long-term prospects, and challenges of this acquisition. So, here’s my rundown, in no particular order, of the implications and imperatives of the Microsoft-Yahoo combination:
1. This is good for M&A, (with some caveats): The $44.6B MSFT offer is by far the largest in the Redmond-based company’s 30+year history and dwarfs last year’s $6B aQuantive acquisition. If history is any gauge, this will likely usher in a boomlet in search-related M&A. Watch for a flurry of relatively small acquisitions as Google and others snap up small search players as they wage war in the burgeoning areas of persistant search, vertical search, social search and the old-fashioned ‘my algorithm can beat up your algorithm’ variety.
Furthermore, the psychological effect of such a large acquisition will do much towards loosening the purse-strings at several major tech players — particularly those sitting on mountains of cash — and providing political cover to pay up for accretive, high-profile deals.
The negative aspects of this deal for the purposes of M&A is, of course, obvious. Yahoo was a famed member of the GYM (Google-Yahoo-Microsoft) Contingent – a trinity of tech buyers responsible for a lot of exits of venture-backed companies in recent years — particularly important given the sluggish IPO window. That ready buyer will now be out of the market — hunkered down managing the tremendous merger integration complexities of a Microsoft acquisition.
2. Google continues to lap the field. The naysayers will certainly dredge up the old ‘Barbarians at the Gate’ quote about how putting together two sick puppies will only result in one really big, sick dog–not the show pony everyone hoped for. There are plenty of examples of that in technology M&A annals, to be sure. That said, MSFT has been trying to buy Yahoo for years. As recently as a year ago, Ballmer & Co. made the overture to then-CEO Terry Semel, only to be rebuffed. The situation for both MSFT and YHOO in search has only deteriorated further. Ballmer now realizes, rightfully so, that if MSFT has any real hope of catching up with Google, the time for that is now! According to current search pageview data, the combined MicroHoo would barely account for half of Google’s share. If Google continues to grow at its current rate — and there is everything to suggest that it will — then any more delay and Google would effectively be unstoppable.
3. With YHOO, MSFT continues its needed transformation. Yes, YHOO needs this deal, but so, too, does MSFT…badly. (MSN China anyone?). Cynics will say it has grown a bit lazy and self-satisfied as it has earned mountains of cash from its operating system near-monopoly and premium desktop applications lo these many years. However, as Office has come under increasing attack from Google, Sun and others offering Web-based apps, MSFT is having to pivot quickly to adjust to a rapidly approaching world where operating systems and desktop applications are becoming commoditized and, dare I say it, increasingly redundant. The cloud computing revolution underway only underscores that threat to Microsoft. The Redmond-based giant has been accused of being many things, but one thing it is decidedly not is stupid. MSFT can execute better than almost anyone. Ballmer and Co. see the writing on the wall and have determined that if their core businesses are going to become marginalized and cannibalized in the coming years, they would prefer to be one the ones to do it themselves.
4. This is good for Google, too. Honest. Forget that GOOG stock fell out of bed this morning. Much of that had to do with a retrenchment beginning last night following earnings that disappointed Wall Street analysts. The MSFT/YHOO deal, even under the best of circumstances, will take at least a year of back-and-forth negotiations, personnel re-assignments and merger integration planning. The consequence for Google will be a huge management distraction for two of its largest chief rivals in the tech world. The world is still Google’s oyster…and now there is no one else at the table with them while they gorge themselves; at least not for the next year or so.
5. No other bidders. Despite the fun drama this would create for all of us who enjoy watching these events unfold, I am not holding out much hope that a Rupert Murdoch will swoop in with a bigger offer to top Microsoft’s. Moreoever, the sheer size of this deal and the creakiness of the debt markets makes a financial buyer-driven deal a relative non-starter. So, don’t expect to see any PE guys throwing their hats in the ring. Furthermore, thoughts that Google might want to play spoiler or muckracker with its own offer for YHOO are likely to be wishful thinking. Infectious Greed’s Paul Kedrosky and others make some good points on this, but I am not persuaded. Hell, Google can’t even sort out what to do about Doubleclick, and don’t get me started on the anti-trust issues a GOOG/YHOO combination would raise. Nope, Microsoft will play this one alone. It’s a very generous offer, it needs to be given the time and consideration it deserves, and — at the end of the day — it needs to get consummated.