MicroWahoo is a Corporate Disaster

They want to do a deal, they don't want to do a deal - the only way to figure out where the two companies have been going is to find a lower-case "o" oracle. I think that the CEO and board at Yahoo are now toast because they turned down a major premium on a stock price that hasn't yet heard a value low enough to make it satisfied. Push will come to shove, and look for either major resignations or institutional investors to push for a dissident slate of directors.

As for Microsoft, if the Yahoo deal was that important, what happens to Ballmer for not being able to make it happen? I'd ask if there was a plan B to find a direction for folks in Redmond, but I think that the Yahoo pitch was just whistling in the dark, because it was essentially an approach that was a me-too-more-of-the-same strategy. In other words, they aren't moving anywhere and probably won't be in the near future. Of couse, there is that little probelm of needing to protect the revenue base of Windows and Office.

Microhoo: Why a Microsoft Acquisition of Yahoo Won't Change a Thing

Money can buy almost anything you want, and for Microsoft, that would be Yahoo – for something over its original bid of $44 billion. Many experts agree that the software giant will likely have its way. But getting what you want can be different from getting what you need, which may not be available at any price.

During a February 1 conference call, Microsoft CEO Steve Ballmer said that acquisition talks had occurred “off and on for the last 18 months.” Microsoft wants Yahoo badly enough to offer an amount greater than its combined net income from 2005, 2006, and 2007 because it is stuck.

Once PCs ruled supreme; now the Internet is king, Microsoft is “struggling,” says N. Venkat Venkatraman, a professor of management at Boston University. Traditional Windows and Office products – 80 percent of company revenues – are mature businesses that won’t fuel accustomed growth. For example, the newest version of Windows, Vista, has had relatively poor sales because of technical problems and a chilly user reception. According to statistics from NetApplications.com, it has a market share of only 12 percent market, versus the nearly 75 percent for XP, the older version. To avoid future financial stagnation, needs a way to grow.

Online advertising seems like the answer to a prayer. According to Kevin Johnson, Microsoft president of platforms and services, it is currently worth $40 billion a year, and may double in size over the next three years.

But Microsoft has had a problem called Google. “I can’t think of a company that has controlled the direction of an industry [to the same degree],” says William Mahnic, professor of banking & finance at Case Western Reserve University. According to Jeffrey Rayport, a partner in consulting firm Monitor Group, Google makes twice the online ad revenue as Microsoft and Yahoo put together, with half the user traffic. Furthermore, the Internet whiz is giving away software functions – such as spreadsheets, word processors, and email programs – that that directly competes with Microsoft’s cash cows.

Microsoft’s has had a roughly 6 percent share of online advertising for a few years, which is “essentially been flat,” according to Karsten Weide, program director of digital media and entertainment for market analyst IDC. But add the 11 percent share of Yahoo, and “it would give them a much better fighting chance” against Google’s 24 percent.

Johnson said that the combination would offer a number of strengths. By eliminating duplicated R&D, freed-up staff could “improve our ability to drive innovation in emerging areas such as video, mobile, and online commerce.” Yahoo and Microsoft have both proven that trying to charge users for services is literally a losing game. That’s how Google has moved ahead: by providing a lot of free content and delivering ads that tie in with someone’s interest.

So, if online advertising is the name of the financial game, why focus on R&D? Because advertising online must still draw audience the way it must in print or television. On the Internet, that means novel and clever applications and services. R&D is supposed to deliver that innovation, as well as finding ways to use data about users to effectively pair ads with people.

Plus, Microsoft management is betting that by combining forces with Yahoo, the combined online advertising revenues would be better, while cutting redundant costs would actually mean more profit to keep shareholders happy. It all sounds smart on the surface, and Weide says, “We think a merger between Microsoft and Yahoo would make a lot of sense.”

But there’s a problem. Neither Microsoft nor Yahoo has been setting records in making money from online audiences. Between 2005 and 2006, Yahoo grew revenue by about 22 percent. Microsoft grew by over 11 percent. Google grew by close to 73 percent. It’s gross profit for 2006 was bigger than its gross revenue from 2005, and it’s significantly larger than Yahoo. Expecting the simple combination of the two companies to better address Google’s market dominance and momentum is unrealistic.

To fend off Google, Microsoft doesn’t need more of the same old thing, whether its own packaged software past or Yahoo’s online business. It needs entrepreneurial spark and invention. But innovation is the result of people, and getting the employees at Yahoo and Microsoft to work effectively in this way will be incredibly difficult.

First there are practicalities. “They’ve not done an acquisition of this size before,” notes Georgia Institute of Technology finance professor Narayanan Jayaraman. The mistakes that could come from an acquisition badly done could cost Microsoft the efficiencies and focus it is counting on.

The two groups may also get along badly. “[Yahoo employees are] always making jokes about Microsoft and the evil empire,” says Mike Grishaver, now CEO of Thingfo but until last fall a director of product management at Yahoo. Rayport agrees: “You’re talking about two cultures that are not just far apart, but that have active animosity.” Should key Yahoo employees become annoyed, they can find many other opportunities in Silicon Valley.

Furthermore, neither Microsoft nor Yahoo has shown the particular type of innovation that is necessary. “[In 2005] I laid out 13 things that Microsoft should buy or start building,” says Robert Scoble, a former Microsoft developer who used to write a popular blog about the company when still an employee there. But management turned down all the ideas because they weren’t big enough at the time to warrant Microsoft’s interest. Those small potatoes included MySpace, photo sharing site Flickr (later purchased by Yahoo), and Internet phone service Skype.

As for Yahoo, its glory days of Internet innovation may also be over. “The problem that Yahoo’s facing, and the reason they’ve been going downhill, is management bloat and lack of vision from the top,” Grishaver says. “When I started at Yahoo, the teams were small and days were about getting things done. Then they started to hire management layer over management layer over management layer who just go to meetings all day.”

In other words, Microsoft’s planned purchase of Yahoo could be nothing more than an expensive “me too” strategy of trying to follow Google, without an infusion of business innovation to start leading. And in the world of the Internet, another term for following is being an also-ran. The tens of billions of dollars could come to nothing more than an expensive way for Microsoft to stay exactly where it is now.

Financial Times on Insider Trading

The Financial Times has another scoop - a study it commissioned, looking at stock trading in select compaines running up to announcements of big M&A activity:

Almost 60 percent of the 27 big deals announced in North America this year were precded by unexplained spikes in trading in the stock of the target company, according to a review of data by Measuredmarkets, a Toronto research firm. This compares with 15 percent for the seven largest deals announced in 2003.

Let's not go totally off the board, as 27 deals do not make a large subject for statistical analysis. And these were only "suspicious trades" and not an item-by-item analysis to see who was involved. But the analysis did look at whether news on specific days might have acted as an expected trigger for the activity. The pattern depended on the industry, with the spikes happening 80 percent of the time with hotels and casinos and just under a third of the time in telecommunications.

Although this isn't proof - let's be clear on that - it sure is a whole lot of smoke. Combine this with the study that the FT featured on July 30, showing that many Wall Street analysts received personal favors from executives whose companies they followed, and you've got to wonder if anything has changed in the world of big investing. Actually, you could assume that it's business as usual, which is a pity. Such activities are undertaken by robber barons - emphasis on the robber - and not real businesspeople, who have some regard for the entire activity of business itself.

The article itself is here, though you have to be a subscriber.