Microsoft-Yahoo. Why I think it's bad for both.

1. History. There has never been a truly successful merger between giant tech companies. Compaq went from healthy to danger list after acquiring DEC.  The tech cemeteries are filled with companies who tried to merge with equals and failed. The closest to success, I can think of is HP-Comaq. H-P is doing okay now, but the operation almost killed them. And now that the dust has settled, just what did they gain buy the acquisition that cost them billions and took years to sort out.

2. Culture. Mergers and marriages bring together often disparate cultures. This often causes ongoing family feuding, children going out on their own and so on.  For those of us who know smart and capable people at both companies, their cultures are decidedly different. Financial analysts and M&A experts very often overlook  the issue of culture. But the employees don't and cultures that don't merge can cripple a company.

3. Microsoft doesn't solve Yahoo's problem. Best I can tell, Yahoo maintains a 1999 business model. It wants sticky eyeballs to come to Yahoo sites and never leave. While people are there they will flash as many ads in front of those eyeballs as the visitors will tolerate. People are tolerating less and less of that. Yahoo has not really adjusted to a mobile strategy, where the ads follow people wherever people wish to go, which is Google's very sharp strategy. What does Microsoft do to either enhance or change that core strategy? I don't know. You may mention Windows CE, but I do not see why tht will get people on-the-go to follow Yahoo any closer.

4. Yahoo does not solve Microsoft's problem. Redmond has so many strategic problems, but I think at the core of it, is that Microsoft is becoming as big and unimportant as did IBM 15 years earlier. It is the undisputed leader in the enterprise and in the world's desktop productivity software. That gives it a long life, but a steadily shrinking one. Microsoft will see some significant ad revenue increases by buying Yahoo, but how long will it take for Microsoft to realize $45 billion in, not just revenue--but actual rofit from this transaction?

5. Neither company scores high in GRAC. This is a term I coined in the 1980s: 'Generally regarded as Cool." GRAC is much more important than merger & acquisition folk realize. Companies whose perspective customers regard what they produce to be cool are the ones that revail, particularly among early adopters. IT folk says this doesn't matter, because their purchases of tens of thousands of something is where the real money is. True, but moving forward those numbers are less relevant, I think, than what and who early adopters generally regard as cool.

OK, I'm no expert. And nobody has ever envied my personal stock performances over the past 6-7 years. But we shall see how this proposed marriage of behemoths works out. We shall see.

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Comments

[Shashi Bellamkonda]

Shel,

I agree that the HP-Compaq was a success& many times companies that produce the same product or service successfuly merge (SBc & ATT). In the case of Microsoft and Yahoo there are a few common products - Messenger, Email, Search, Advertising but I dread to think of the pain that any user of these products may have if they decide to kill the product at any side. The other point I would like to make is that the cost of the merge may be greater than any saving they hope to get by combining resources.

What I am hoping for is they prove the naysayers wrong and by combining talent that come up with some great technological advance.

Shashi

[Tom]

Hi Shel - I think you are being too kind with the DEC/Compaq analogy (I'm thinking more like Wang and word processors.) The cultural scenario is closer to the Hollywood studio/record label denial mindset. Yahoo wants everyone to go to its movie theaters every day (portal) and Microsoft wants customers to buy albums (Vista/Office) when all we really want to buy are those songs (applications) that we need when we need them. Google keeps both companies off balance through its willingness to test new ideas forever and accept failure.

I'm sure the spreadsheets more than justify the deal from operating cost "synergies." The Silicon Valley forest floor likes new compost from business failures and consolidations that fuel innovation from the humans who move on to new GRACio startups.

This is going to be a nasty fight that I predict will get personal. In fact, Google's David Drummond just lobbed the first grenade. I'd look for the usual Silicon Valley anti-Microsoft suspects to start dishing quotes tomorrow.

Look forward to your new video works.

Tom

[John Cass]

You might be right about the merger issue Shel, melding two cultures is going to be difficult. Though I think there are lots of examples of good high tech mergers. Cisco is probably the best example of a company can has done lots of mergers successfully. I suspect on the search side it will be the Yahoo! search team that takes the lead.

[shel israel]

John, I tried to emphasize mergers between relatively equal giants don't work. Cisco is one of many companies who has successfully acquired a bunch of little companies, mostly for technology. That is a different story.

[John Cass]

The size does make a difference, you are right there. Though I think it has more to do with the approach taken in the merger. Neville Hobson's post on strategy was helpful in that regard.

Hopefully for all employees involved if the merger goes through, it is successful, despite misgivings.

[Curt Monash]

Actually, Oracle/Peoplesoft is a pretty successful merger. Ditto Oracle/Siebel. Ditto, back in the day, Computer Associates/Uccel, Siebel/Scopus, and others.

As per http://www.texttechnologies.com/2008/02/03/microsoft-yahoo-synergies/ , there's a lot of potential for Microsoft/Yahoo.

CAM

[Mark Harrison]

There's an old investment saying, often (wrongly, as far as I know) attributed to Buffet.

"Put two bad companies together and you get one big bad company."

Now, I think there's actually a lot that both MSFT and Yahoo! do well... but I agree strongly with your analysis.

I fear that a key reason that it's getting so hyped by the non-IT analysts (particularly those that work at investment banks as opposed to journalists) are that they are DESPERATE for some kind of mega-deal to go through to restore public confidence in slumping markets, and to pick up deal-flow.

[antonis hontzeas]

Good comments (in addition to the excellent entries by Scoble and Winer).
Whatever the result of this, I think it will provide ample material for future MBA strategic planning courses.

[Jack]

I think this merger is only for MS to bury Google....if that happens then they are going to deem it a success