Microsoft’s withdrawal of its Yahoo acquisition proposal may just be a negotiating tactic. Or it could in earnest. Time will tell. And many shall opine. But what is the significance of the move?
I have heard a few people express relief that the deal won’t be happening. I can understand this, to a point. Almost exactly one year ago, I told Liz Montalbano of ComputerWorld that I thought Microsoft’s heart wasn’t in it when it came to acquiring a Web advertising firm. And when MS bought AQuantive for 3x what Google paid for DoubleClick, I was worried that the deal made no sense and was just a big waste of money.
But when MS announced their intent to acquire Yahoo, things started to make sense. Effectively, Microsoft has decided that being on the Web, and being a major player in Web advertising, is crucial to the evolution (and survival) of the company. They’ve also decided that the combination of tactical acquisitions and organic development of MSN/Live ain’t cuttin’ it. By bringing in Yahoo, Microsoft could thrust forward in this game, and bring in developers and executives who understood the space. Furthermore, they could begin to derive real value from the AQuantive deal, since AQuantive’s ad serving platform and Razor Fish’s agency savvy could combine really well with the reach that Yahoo’s network of sites would provide. Add Silverlight to the equation, with its rich media capabilities, and things get really exciting (and Yahoo’s presence on the Web could easily get Silverlight over the adoption hump it now faces).
Sure, Microsoft + Yahoo looks like a difficult cultural combination, and a difficult technological combination too, given Yahoo’s prolific use of Open Source software. So what? Let Yahoo operate largely separately, but let its executive and senior technical ranks collaborate closely with AQuantive and Microsoft “proper” on the necessary ad serving and ad network technology. Let Microsoft re-invigorate Yahoo’s once exemplary developer program; after all, that’s what Microsoft does best. And let the coalescing among the ranks take place gradually and naturally. The people on most Microsoft product teams are bright, good-natured, and enthusiastic about their jobs. Executive-level bickering aside, I strongly believe that technologists at both companies would get along really well, once all the animosity stopped being newsworthy and people got down to work. Does that sound naive? I stand by it. Cast aside the stereotypes; the techies at Microsoft are talented and welcoming and I can’t believe the Yahoo guys wouldn’t reciprocate. Some would leave right away, but the rest would really start to like coming to work.
I don’t think Microsoft should have paid $37 a share; I think $33 was already very generous. So, from that point of view, walking was the right thing to do. But if Yahoo doesn’t come back to the table with more reasonable demands, what will Microsoft do? They need this deal, despite Steve Ballmer’s protestations to the contrary, and despite the prevailing wisdom that the merger would be unsuccessful. And they’ve showed their hand, so the market knows they need the deal too. I don’t see a good alternative acquisition. And I’m considering AOL when I say that. If Microsoft fails here, and continues to mis-handle its damage control around Vista, then the company will be in a bad place. The setback won’t be irreparable, but it will be significant.
We’ll have to wait and see. But watch carefully. The next few months are crucial to the world’s largest software company.