by Wendy M Grossman | posted on 01 February 2008
Large numbers are always fun, and $44.6 billion is a particularly large number. That's how much Microsoft has offered to pay, half cash, half stock, for Yahoo!Before we get too impressed, we should remember two things:
As of last night, Microsoft had $19.09 billion in a nice cash heap, with more coming in all the time. (We digress to fantasise that somewhere inside Microsoft there's a heavily guarded room where the cash is kept, and where Microsoft employees who've done something particularly clever are allowed to roll, naked, as a reward.)
Even so, the bid is, shall we say, generous. As of last night, Yahoo!'s market cap was $25.63 billion. Yahoo!'s stock has dropped more than 32 percent in the last year, way outpacing the drop of the broader market. When issued, Microsoft's bid of $31 a share represented a 62 percent premium.
That generosity tells us two things. First, since the bid was, in the polite market term, "unsolicited", that Microsoft thought it needed to pay that much to get Yahoo!'s board and biggest shareholders to agree. Second, that Microsoft is serious: it really wants Yahoo! and it doesn't want to have to fight off other contenders.
In some cases – most notably Google's acquisition of YouTube – you get the sense that the acquisition is as much about keeping the acquired company out of the hands of competitors as it is about actually wanting to own that company. If Google wanted a slice of whatever advertising market eventually develops around online video clips, it had to have YouTube. Google Video was too little, too late, and if anyone else had bought YouTube Google would never have been able to catch up.
There's an element of that here, in that MSN seems to have no immediate prospect of catching up with Google in the online advertising market. Last May, when a Microsoft-Yahoo! merger was first mooted, CNN noted that even combined MSN and Yahoo! would trail Google in the search market by a noticeable margin. Google has more than 55 percent of the search market; Yahoo! trails distantly with 17 percent and MSN is even further behind with 13 percent. Better, you can hear Microsoft thinking, to trail with 30 percent of the market than 13 percent; unlike most proposals to merge the numbers two and three players in a market, this merger would create a real competitor to the number one player.
In addition, despite the fact that Yahoo!'s profits dropped by 4.6 percent in the last quarter (year on year), its revenues grew in the same period by 11.8 percent. If Microsoft thought about it like a retail investor (or Warren Buffett), it would note two things: the drop in Yahoo!'s share prices make it a much more attractive buy than it was last May; and Yahoo!'s steady stream of revenues makes a nice return on Microsoft's investment all by itself. One analyst on CNBC estimated that return at 5 percent annually – not bad given today's interest rates.
Back in 2000, at the height of the bubble, when AOL merged with Time-Warner (a marriage both have lived to regret), I did a bit of fantasy matchmaking that regrettably has vanished off the Telegraph's site, pairing dot-coms and old-world companies for mergers. In that round, Amazon.com got Wal-Mart (or, more realistically, K-Mart), E*Trade passed up Dow-Jones, publisher of the Wall Street Journal (and may I just say how preferable that would have been to Rupert Murdoch's having bought it) in favour of greater irony with the lottery operator G-Tech, Microsoft got Disney (to split up the ducks), and Yahoo! was sent off to buy Rupert Murdoch's News International.
Google wasn't in the list; at the time, it was still a privately held geeks' favorite, out of the mainstream. (And, of course, some companies that were in the list – notably eToys and QXL – don't exist any more.) The piece shows off rather clearly, however, the idea of the time, which was that online companies could use their ridiculously inflated stock valuations to score themselves real businesses and real revenues. That was before Google showed the way to crack online advertising and turn visitor numbers into revenues.
It's often said that the hardest thing for a new technology company is to develop a second product. Microsoft is one of the few who succeeded in that. But the history of personal computing is still extremely short, and history may come to look at DOS, Windows, and Office as all one product: commercial software.
Microsoft has seen off its commercial competitors, but open-source is a genuine threat to drive the price of commodity software to zero, much like the revenues from long distance telephone calls. Looked at that way, there is no doubt that Microsoft's long-term survival as a major player depends on finding a new approach. It has kept pitching for the right online approach: information service, portal, player/DRM, now search/advertising.
And now we get to find out whether Google, like very few companies before it, really can compete with Microsoft. Game on.
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