Microsoft and Yahoo Sitting in a Tree…

The on again, off again rumours of a possible Microsoft/Yahoo! merger has Wall Street pretty confused. Yahoo’s stock soared over 18% in early trading today but ended up only about 10% after a Wall Street Journal article cited that talks were completed without a deal. Who really knows though?

What I do know is this. A combination of Microsoft and Yahoo would be a logistical nightmare. It’s one thing to acquire and integrate small, focused companies, which is what both Microsoft and Yahoo have had a history of doing. But an integration of over 11,000 employees at Yahoo into Microsoft’s 70,000+ isn’t nearly the same thing. On top of the sheer number of employees, there’s also the issue of the extreme similarities between many of the two companies’ products and departments. You can be certain there would be a lengthy period of time of pure madness, which I’m sure Google would take advantage of. Really, the only thing that makes sense in this whole rumoured deal is the combination of statistics – Microsoft and Yahoo together would present a decent force against Google in the search and online advertising space, in terms of market share. It remains to be seen if such a combination would even be able to retain that market share through the initial integration process. I highly doubt it. The amount of product shifts would be a severe inconvenience to their customers.

This is especially apparent in the fact that Microsoft hasn’t done a merger/acquisition greater than the $1 billion range. Ever. Microsoft has focused on acquiring small companies that have a focused product line that either helped start a new business section within Microsoft or bolstered an already established department. For a company the size of Microsoft, growth has been surprisingly organic. This is unlike many other technology companies, that have relied upon big mergers and acquisitions to grow to where they are today. A purchase the size of Yahoo would be a radical departure from Microsoft’s past ways. (And perhaps that’s just what they need…)

Corporate culture and direction also plays a big part in acquisitions and mergers. Yahoo has been slowly turning from a search engine company to a media/social/content company. Their more recent acquisitions clearly point in this direction (del.icio.us, Flickr, Konfabulator, and MyBlogLog). Yahoo’s a little more ‘hip’ and ‘cool’ than plain ol’ Microsoft. A combination of the two would have been like IBM acquiring Apple. It would be an auto cap on Yahoo’s culture and status. Despite all the initial complaints, especially when Yahoo acquired del.icio.us and Flickr, they’ve done an admirable job of letting the services run free and progress in their respective directions (although I’m sure there’s a little birdy whispering to them in the background).

I have severe doubts about the possibility of this merger. Aside from the immediate benefit of pleasing shareholders, Yahoo really doesn’t have too much to gain. I believe they have the capability to compete with Google on their own, even if it is with a minority of the market. The logistics problems are just too great to create a more capable competitor to Google. On the other hand, the possibility of an in-depth partnership between Yahoo and Microsoft (a joint venture in the search/online ad space perhaps?) seems to have legs. Who knows, a search/ad spinoff from both companies could be better placed and more flexible in the rapidly changing internet industry.

I’ll admit it, I’d like to see a huge tech merger if only to contemplate the scope of such a deal…

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