Why a Microsoft/Yahoo! Merger Would Help Google

Written on February 4, 2008  |  by RP Mickler  |  Leave a Comment  | 

Last Thursday January 31, 2007, Terry Semel announced his resignation from the Yahoo! board of directors. A day later, Microsoft presented a $44.6 billion stock and cash offer to Yahoo! shareholders that came below Yahoo!’s 52-week high of $34.08 per share. On Friday, Microsoft’s PPS dropped six percent and Yahoo!’s shares increased 48-percent from $19.18 to $28.38, still far less than the $31 PPS bid. Seems like investors wanted a better offer and aren’t convinced this is in Microsoft’s best interests – financing the operation will take at least $4 billion more than what Microsoft has in cash reserves, and that means taking on debt which would be Microsoft’s first long-term borrowing action since 1991. Still, Ballmer says advertising online will double to an $80 billion market in the next two years and a combined Yahoo! and Microsoft would make a more formidable component to Google. Combined, the Microsoft/Yahoo! cooperation would represent 25-30 percent of the search market.

Google, of course, cries fowl, and went to extreme measures to offer their help against the Redmond vikings. Google CEO Eric Schmidt called Yahoo! CEO Jerry Yang on Friday to offer his help in protecting Yahoo! against Microsoft; Google suggests such a merger would be illegal and monopolistic. Microsoft’s hostile bid for Yahoo raises troubling questions,” David Drummond, Google’s chief legal officer, wrote. “This is about more than simply a financial transaction, one company taking over another. It’s about preserving the underlying principles of the Internet: openness and innovation.”

I attempted to contemplate what a Microsoft/Yahoo! merger would mean to the industry, me, and to my clients. The problem was ponderous. Both of these companies have been around since I’ve been in the industry and the idea that Yahoo! is to be assimilated by Microsoft shot shivers down my spine. Strangely, AOL announced this week as well that they’ll stop supporting Netscape… it’s like an end of a grand era. Anyway…

In terms of benefits, I think interpreting Microsoft’s actions may fall to what you might feel about Microsoft or Google. If you feel Microsoft is a dominating force in the industry that prohibits innovation through controlling desktop operating systems, productivity applications, and Internet browsing, then the deal looks bad. If you feel Google is a champion of open and honest and fair competition (as they’d like to paint themselves), you’d also think this deal is bad. However, you might feel that Google’s dominance of an $80 billion search market is equally bad and may welcome Microsoft’s intervention.

What does it mean to small business? I think little other than better ad prices for web. However, there could be a longer reach in terms of Internet momentum and innovation. I say this because “search” isn’t likely to become a commodity; I think Google’s market cap screams that. Search has everything to do with Long Tail (www.thelongtail.com) principles, and innovation in search is necessary to drive new value from the web. Increasing competition may be a way to force ad rates downward in the short term, and push Google to continue innovating search in the long term. Case in point: Google’s redirected its web advertising revenue into alternative energy, philanthropy, and even a space program for traveling to the moon. Last week, Forbes even asked, “Can Google fall as the world’s top internet company?”; Google’s shares dropped 8.6% on Thursday (prior to the Microsoft announcement) on word of poor earnings for Q4; Q4 was the smallest net income growth for Google on record.

Further, a student of mine recently remarked: “I see no difference between Google’s search result and MSN’s or Yahoo!’s”. Good news for Ballmer; bad news for Schmidt. However, perhaps great news for the average user because it may force Google to return a bit to reality: “Hey, Schmidt: you are a search company, remember? How’s that core competency coming along?” A threatened Google may actually be better for all of us as remembers its roots, it re-focuses on what matters, and it strives to innovate around its monster competitors, yielding better results for the web as a community.

So, as painful as it might be, I raise my glass to Ballmer. Good luck. Take the risk, eat Yahoo!, and force Google to remember who they are. In the end, acquisition may bring renewed effort to innovate search and provide better tools to us all.

R