The merger dance: Microsoft or Google+Yahoo?

  • Analyst Opinion - This should be an interesting dance:   Google was gaining near monopoly power over ad revenue and both Yahoo and Microsoft were having trouble blocking them from becoming the most powerful company on the web.   In fact, we likely could argue that since Google is at the center of most searches, they already are the most powerful company on the web as they, effectively, are the gate keeper for most everyone else.  Let’s look at this from a couple of angles.

    Microsoft + Yahoo

    Combined, Yahoo and Microsoft have the two most powerful portals.  While Yahoo’s star has been fading, largely because they missed the social networking wave that favored their model, Microsoft has been chasing that star and Yahoo, through their chat properties, actually has the strongest existing foundation for such a move. Microsoft has invested in Facebook, which blocked Google, and Facebook is currently considered to be the strongest of the social networking properties. If, and this is a really big if, Microsoft can integrate and bring all of this to bear they should be able to slow Google’s growth significantly but likely not stop it because the advantage Google has is being built into the behavior of folks browsing the web.
    On the other hand, when looking across Google’s quarterly reports, it would appear that there is a trend (assuming the fourth quarter isn’t a fluke) for web users to go increasingly to locations like Amazon and Facebook and not first to Google, suggesting a strong portal strategy could eventually reduce significantly Google’s web presence, power, and revenue.    

    The Merger technically should be comparatively easy, given a lot of commonality between Yahoo and Microsoft in terms of tools.   The Yahoo culture is unique though and there it is likely that there will be an elimination of common services. But Microsoft is more experienced in people management and high performing employees would likely be safer (assuming they can adapt to the Microsoft culture) than they were under Yahoo alone.  

    Google + Yahoo?

    If Microsoft’s acquisition of Yahoo fails, and in anticipation of that, Google is likely to bid against Microsoft to either take the company away or make the acquisition painfully expensive, should Microsoft win.   But, clearly, this is not as natural a move for Google and their first likely strong block will likely be on anti-trust grounds; however given their power in this space, the success of this is far from a given.

    The combination of the Yahoo and Google has less common ground, as Google’s model is not based on owning content, but is rather based on owning the path to it. Google would not be as interested in keeping Yahoo alive and may find that shutting large portions down will better fit its long term model and plans.   In short, since the goal of this would be to block Microsoft, their task is far easier in that making Yahoo work isn’t critical to the success of their plans.  

    Google’s culture would actually be favored over Microsoft’s by the employees, but Google would cut dramatically deeper than either Yahoo alone or Microsoft with Yahoo would do.  This should have the executive team at Yahoo favor Microsoft in this instance. Coupled with Google’s stock slide resulting from missing analyst expectations with its latest financial report, Google is at a slight disadvantage right now, should both companies decide that Yahoo is a must win acquisition.  

    Technically, the two properties are very far apart and Google would be tempted to remove much of Yahoo’s technical staff quickly. However, if they plan to preserve the sites, they will need to keep this staff on-board during the transition.  This staff will know their time is limited to the existence of their existing system, which makes it more difficult to motivate and get the job done right.  In short, they’ll know that they’ll likely be laid off if they complete their tasks. They are likely to drag their feet in a Google-Yahoo scenario.  
    In both instances, common support staff is at risk because Microsoft and Google can rapidly take these common services under their existing service umbrella.   

    What results?

    Under Microsoft, you will likely see a much higher integration with Microsoft’s other properties and some combination between Yahoo’s chat rooms and Microsoft’s social networking sites.   Yahoo will likely accelerate its technology and look more different than it is today - and more consistent with Microsoft’s other properties.  
    With Google, there is a good chance Yahoo would either go away or become dramatically smaller, but retain much of its existing look and feel. Staff reductions under the Google move would likely be significantly more dramatic, but any employees that are left will probably like the Google employee programs better.   

    Regardless, either acquisition will have a significant impact on the web, Yahoo is not an insignificant property and this could signal a consolidation phase of web properties, which could reach broadly and deeply.As we enter what may be a recession, expect to see this consolidation phase to accelerate.

    Rob Enderle is one of the last Inquiry Analysts.  Inquiry Analysts are paid to stay up to date on current events and identify trends and either explain the trends or make suggestions, tactical and strategic, on how to best take advantage of them.  Currently he provides his services to most of the major technology and media companies.