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Analysis: Microsoft could, but shouldn’t buy Yahoo

Analysis: Microsoft could, but shouldn’t buy Yahoo

By Anders Bylund | Published: January 13, 2008 – 08:05PM CT

The Greek chorus calling for Microsoft to buy Yahoo is mumbling louder than ever. Journalists, analysts, and other assorted pundits are saying that Mr. Softy needs to pull the trigger soon or lose a golden opportunity forever. Some of the singers are personal friends of mine, but I still can’t help but think that the speculation is dead wrong.

The potential upside

Let’s play devil’s advocate for a second and explain why this deal would make sense at all. Yahoo and Microsoft Live combined can hardly shine Google’s shoes in terms of search market share. Google is at 65 percent according to comScore, and a combined Microsoft/Yahoo would still only rate a 28 percent share. That’s arguably still better than 21 percent (Yahoo) and 7 percent (Microsoft) alone, but how much better is hard to say.

The same goes for online advertising share: combined, Microsoft and Yahoo can’t touch Google, but despite its recent struggles, Yahoo is a profitable business. A merger would see Yahoo give Redmond instant firepower in the online business wars, with a more developed ads business as well as the most popular “front page” on the Internet. Microsoft could rather easily afford to buy the yodeling veteran, though it would have to do at least partly a stock-swap deal or take on some debt to get ‘er done.

The potential downside

Now come the factors weighing against a Seattle/Sunnyvale hookup. Combining two companies that are losing market share on their own won’t automagically reverse that trend, and Microsoft won’t be able to buy a Yahoo every time the tank runs low. Unless Steve Ballmer and his gang have some hands-on ideas on how to shake out synergies that can’t be made through a more standard business-to-business partnership, there’s no reason to gamble upwards of $40 billion on a stopgap fix.

And Yahoo might not even want to be bought. I happen to believe that things are looking up now that co-founder Jerry Yang is acting CEO for a while. Yang seems to understand that Yahoo’s greatest strength lies in the community it has built around a massive user base, and Terry Semel never looked like he got that.

If Yang can hook the world’s biggest traffic generator up to some new revenue-generating machinery, all will be well. Microsoft buying the company at this juncture would put a crimp in Yang’s authority and autonomy, and would rob shareholders of potentially massive gains if Yahoo becomes all that it can be.

Shareholders and board members get a serious say in any takeover offer here. Yahoo has an active poison pill provision that would let the board issue tons of additional preferred stock in case of an unapproved buyout proposal. That makes a hostile takeover of a company Yahoo’s size very expensive, pretty much pricing the company out of any reasonable bid. So it would have to be a mutually agreed kind of deal, and I just don’t see that being in Yahoo’s best interest right now.

So on the one hand, Microsoft risks not getting what it wants out of a very expensive deal, and on the other, Yahoo appears to have a good thing going on as a standalone business right now—good enough that shareholders would likely balk at any buyout.

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