May 3rd, 2006

Don't do it

Posted by Mitch Ratcliffe @ 4:35 pm

Categories: Business & Technology

Tags:

"Combined, MSN and Yahoo would have all three pieces and, at least on paper, could leapfrog Google," according to The Wall Street Journal. I didn’t realize they were passing the crack pipe around the Journal’s newsroom. This is such aThe story sounds like internal Microsoft politicking finding its way into the public eye. sweeping generalization that ignores so many contradictory strategies and redundancies shared by the two companies that the integration would virtually freeze the resulting YahSoft (Microhoo?) in place while Google scooped up the cream of the engineering class running screaming from Yahoo.

With Microsoft shares languishing in the low 20s these days, sporting a P/E of 19.15, Microsoft would be paying a premium for Yahoo in both stock and cash, which would dilute the long-term return to investors. Since such mergers are seldom very successful, I can’t imagine investors would be happy about that. Big risks should have large returns. Ask any Yahoo investor still smarting from paying $5 billion for Broadcast.com; the only ones who won in that deal were Mark Cuban and Broadcast.com shareholders.

Over at Yahoo, the deal would likely place most of the company in conflict with Microsoft’s MSN, so that most of one or the other portal would have to be abolished to create the savings that made the two sites combined traffic more profitable. With Microsoft looking to transition its home page to Live.com, Yahoo’s content would almost certainly become the fodder for thousands of gadgets on the AJAX-y Live.com home page. In other words, it will be a long goodbye for Yahoo if the deal goes through.

The story sounds like internal Microsoft politicking finding its way into the public eye. Several executives seeking to make their names bigger are cited as drivers of the acquisition and, therefore, these rumors. These guys should be ignored, so that both Yahoo and Microsoft can focus on bigger problems, like Google. Trying to solve their mutual problem by melding their different technology and business problems would be a huge distraction for many years.