David Crow

Microsoft’s Yahoo bid ends well — for Google

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

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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

When Microsoft made its unsolicited $44 billion bid for Yahoo in February, a match looked distinctly possible. Like Beatrice and Benedict in Much Ado About Nothing, it seemed that the two were ready to put years of sniping and barbed flirting behind them and forge a powerful union. As a pair, they could have given the all-dominant Google a run for its money in online advertising, an industry which could be worth $80 billion by 2010. All didn’t end well, however, and the marriage — at least for now — is off. After lengthy negotiations, Microsoft chief executive Steve Ballmer walked away earlier this month, declaring that Yahoo’s asking price of $37 a share was just too high.

Ballmer’s sudden change of heart might seem puzzling. When he launched the bid he made clear that he wasn’t prepared to go home empty-handed. If Yahoo boss Jerry Yang wouldn’t play ball, hinted Ballmer, then Microsoft would appeal direct to shareholders with a hostile bid. Somewhere along the line, however, the flame went dead. When Yahoo wouldn’t budge on price, Ballmer began losing interest, reportedly asking Microsoft staffers, ‘Hey, shall we just can this thing?’ The news that Yahoo was in talks with Google about outsourcing some of its search business was the final straw; Ballmer detests Google, famously prefixing its name with all manner of expletives.

The truth is that personal animosities between Ballmer, Yang and Google chairman and chief executive Eric Schmidt have affected every stage of this failed merger. Like many of his Silicon Valley engineers, Yang is instilled with ‘purple pride’ — insider-speak for Yahoo’s funky, consumer-led self-image. Conversely, he views Microsoft as a grey-suited crew stuck in the last century, a time when corporate software sales were the real way for tech firms to make money. For Yang, the deal with Microsoft was less about the interests of shareholders, who were overwhelmingly in favour of a merger, and more a battle for the soul of the firm he co-founded in 1995.

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.

Microsoft could also just sit out for a while. Ballmer can take comfort from the fact that Yang’s woes are far worse than his own; it really is hard to imagine a lamer duck. Few doubt that the Yahoo chief put personal sentiment before shareholder interest. Nor does anyone really believe Yang will be able to show that his firm is worth substantially more than Microsoft’s $33-a-share offer any time soon; the last time Yahoo’s shares were worth the $37 Yang was holding out for was in January 2006. If the stock continues to underperform, Ballmer could pick it up cheaper further down the line.

As long as Yang is calling the shots, however, Microsoft is unlikely to secure a final deal. Although speculation is rife that the two parties will be back at the table before the chairs go cold, it is most likely just hype. Meanwhile, angry shareholders are calling for Yang’s resignation and Yahoo is facing several lawsuits, while activists are busy buying stock to enable them to boot the board out at the annual meeting in early July. Either way, it looks increasingly unlikely that Yang will be in his job at the end of the year. In the short term, he’ll probably try to cement the agreement with Google, a move that could drive $1 billion to Yahoo’s bottom line — earning a reprieve, perhaps, but not a pardon. The trouble is that without Microsoft around, Google might be much less interested.

As for winners, there’s only one: Google. Already accounting for 56 per cent of US online searches and 80 per cent of Western Europe’s, Google is now perfectly poised to chip away at the dwindling market shares of Yahoo and Microsoft. Eric Schmidt must have looked on last week’s events with gleeful disbelief. By failing to agree on a merger in the last three months, his two biggest competitors have done more to cement Google’s dominant position than it could possibly have done for itself. Despite Ballmer’s labours, his failure to secure the all-important love match at the right price means Yahoo and Microsoft have well and truly lost.