Microsoft’s Yahoo bid ends well — for Google

17 May 2008

David Crow says personal animosities played a major part in the failed merger of Microsoft and Yahoo — to the benefit of their most potent online competitor

Ballmer never expected to be welcomed as a liberator, but he didn’t expect palpable hostility from Yahoo staff. These tensions would have made it a very difficult merger to manage, especially if Microsoft were to achieve the $1 billion in savings it identified when it made its bid. And aside from an almighty clash of cultures, there were other reasons Microsoft chose to walk away. Although anti-trust authorities signalled they would allow the two to join — the theory being that one serious competitor for Google was better than none — they were set to impose important caveats. Merging the two firms’ search platforms, giving them a 30 per cent share to Google’s 60 per cent, would not have been a problem, but regulators were less keen on tie-ups in other areas. The most immediately attractive benefit of a takeover was the chance to merge email and instant-messaging platforms; together, they would have accounted for around 90 per cent of those markets.

Both Microsoft and Yahoo have been badly damaged by the failed merger. When Ballmer made his bid, he effectively conceded that Microsoft had failed in $10 billion-worth of internal efforts to compete with Google, achieving a market share of online advertising of barely 10 per cent. Microsoft was also admitting that it could no longer go it alone; if it was to discard the proprietary, protectionist approach which had served it so well in the 1980s and 1990s, it would need the help of a true internet firm like Yahoo. Such a statement, once made, is awfully difficult to retract.

For this reason, Ballmer will spend the rest of the year trying to forge new alliances. One option is to cobble together minor stakes in other internet properties such as News Corp’s social network MySpace — or Facebook, of which Microsoft already has 1.6 per cent. Others suspect Ballmer will bid for Time Warner’s internet division, AOL. The theory behind this is that Microsoft could build a broad arc of web destinations to challenge Google’s dominance — or at least that’s what Ballmer wants shareholders to believe. Without Yahoo, however, the success of any coalition is doubtful, especially in terms of Microsoft’s ambition to gain more traction in the online advertising market.