Microsoft and Yahoo!: TKG’s Take
Today’s big news is Microsoft‘s unsolicited takeover bid for Yahoo!. The $44.6 billion bid represents a 62 percent premium on Yahoo!‘s closing stock price yesterday, which was affected by Yahoo!’s depressing earnings announcement, in which Yahoo! said it would lay off 1,000 workers to “re-accelerate” growth.
For 2007, Yahoo! reported a net profit of $660 million, down 12.1 percent as Yahoo! boosted marketing and development spending by 25 percent in an effort to catch up with Google. Yahoo! has a market capitalization of about $25 billion, compared with more than $300 billion for Microsoft.
Already, Yahoo!’s stock price is up 45 percent, which should be some solace for the execs — many departed — holding options, who have been watching their value fall precipitously.
Microsoft’s bid, of course, did not come from out of the blue. Earlier last year, Yahoo! broke off merger talks, so one assumes this new offer won’t be automatically accepted. Our guess is that other bidders will not enter the picture, unless Yahoo! solicits a “white knight.”
One thing we believe is that the “cultural” issues between Yahoo! and Microsoft are not as pronounced as they have been in the past. Yahoo!’s culture has changed enormously in recent years as it has struggled against Google, and it no longer seems to have such strong identity issues.
Going forward, the real question is who’s best positioned to compete with Google. According to comScore, Google’s share of the global Web search business stands at 77 percent, followed by Yahoo! at 16 percent and Microsoft at less than 4 percent.
Another question is who can get by the tough regulators at the EU (we don’t anticipate significant U.S. problems). Our view is that a Microsoft/Yahoo! merger would strengthen the competitive picture against Google, so regulators would ideally welcome it. Indeed, just a few weeks ago we stopped using the politically correct language “and Yahoo!” when talking about local search. Google is that far ahead.
Microsoft’s Aggressive Steps
What’s clear is that Microsoft plans to take the steps necessary to match up with Google. It has been extremely aggressive as of late with both the aQuantive purchase and the $300 million investment in Facebook. From a Microsoft point of view, Yahoo! is clearly its single best growth injection.
The focus here, of course, is on search. But search is just a piece of the puzzle. Yahoo! also brings to the table its instant messaging service, news access with audio and visual feeds, and personalized Web pages. For business, it offers several services aimed at helping companies boost their presence on the Internet. It has stakes in or owns several other companies, including online shopping with alibaba.com, Flickr for photo blogs and Kelkoo, which compares prices.
Generally, it is conceded in the industry that Yahoo! — including Yahoo! Local — has a first rate social platform. Yahoo! also has developed a relationship with hundreds of newspapers for its HotJobs recruitment service that has extended into display advertising and search. The newspaper consortium appears to be doing fairly well with Yahoo!, although it recently opted to go with Zillow for real estate.
A Closer Look at Integration Issues
An integration of Yahoo! and Microsoft assets is so complex and daunting that we believe little would quickly change. Globally, integration will be hampered by the companies’ respective partnerships, which are intertwined and deep.
The complexity of retaining Yahoo! consumer usage is another major concern. We view the integration of the ad platforms to be similarly complex, but perhaps not as daunting. We would note, however, that the merger would benefit from MSN Search’s longtime relationship with Overture, now known as Yahoo! Search Marketing. AQuantive is still separate, so bringing back-office operations together will be less sticky and tricky.
The integration of Hotmail with Yahoo! Mail is a bigger problem. We wouldn’t anticipate any near-term effort to integrate those two properties. Another area of overlap is in mapping. Yahoo! Maps has significantly greatly market share, but Microsoft has been pumping even more money into its Virtual Earth service and would likely become the merged company’s new standard. Another area of overlap is in mobile, where Yahoo! Mobile services have done well, but would run into Microsoft’s forced synergies on the WINce operating system.
(This post was coauthored by Matt Booth and Peter Krasilovsky.)