Friday, April 04, 2008

Should Microsoft walk away from Yahoo?

I am no longer an employee of Microsoft but I do still own a modest chunk of their stock, which means that I am not completely unbiased, but who is these days? Anyway, my opinion is that Microsoft should continue to remain "impatiently patient" and give Yahoo management a bit longer to let reality wear them down so that they can finally accept the inevitable, that a merger of some sort makes a lot of sense for both parties and all shareholders.

I suspect that the remaining stumbling block is twofold: 1) how to preserve as much of the Yahoo brand as possible (while hacking off the deadwood), and 2) how to enable the egos and images of the Yahoo founders to live on in some significantly productive way within the impersonal culture of Microsoft.

As far as money, although that is always a big deal for Wall Street and some shareholders, I do not think that is the deal-breaker here. In fact, if anything, I think Microsoft could lower their big and it would still be quite attractive. I do not think Microsoft will or needs to restructure the financial terms to make the deal work.

Although walking away from the current proposal you allow Microsoft to come back later and pick up Yahoo at an even cheaper price, I think they are too sincere and intent on making the deal happen as soon as realistically possible.

Besides, if Microsoft tormented Yahoo in that way the ASPCA would likely come after them for cruelty to animals. Yahoo is definitely looking a lot like a stray dog wandering the streets looking for a good home.

The good news, the silver lining of the dark cloud of letting the deal string out, is that it is giving both sides a nice quiet period to contemplatively examine any and all issues that would interfere with integration.

My own view is that although there may be a short list of "easy" integration issues that can be taken care of in the first year, both operations (e.g., high-profile Yahoo services and high-profile MSN services) will likely operates in parallel for a couple of years. Duplicated services will not compete for profits per se since all profits go to the parent company, but will compete for survival and that will ensure that staff remains on their toes and does not fall into complacency on either the Yahoo or Microsoft side of the fence.

As far as the major technical integration problem of the differing cultures of Windows and Unix (with some Mac thrown in to spice it up), I would simply note that the world is filled with a mixture of technical cultures (including proprietary versus open source) and the faster and sooner that Microsoft works out an accommodation to bridge the two cultures, the stronger they will be to face the future of a diverse culture landscape. Being forced to bridge the "culture gap" is a really, really good thing for Microsoft and its shareholders. A Windows "mono-culture" has always been a technical and business risk for the company and its shareholders.

I am assuming that online services will finally be separated from the Windows operating system division and run as a relatively standalone business unit in conjunction with Yahoo. In other words, Yahoo and current Microsoft online services run as distinct business units (brands) but in a new online services division on a par with the current top-level divisions. I am hoping that one or both of the Yahoo founders will serve as co-presidents of such a new division, at least for the first two years. This would enable the Yahoo brand and the founders' egos and images to survive in some form as the new division gradually finds its feet.

Yes, the deal faces a lot of challenges, but that is what Microsoft has always been all about.

I think the deal will ultimately be made, once the brand and ego and image issues are addressed, and will work out extraordinary well for all parties, including customers, consumers, and businesses.

Let be hedge on that claim... I have a very low-level of confidence that Google will benefit in the long-run from this deal going forward. But... a Microsoft/Yahoo deal will force Google to "get real" rather than continue to coast on the success of their one big success.

-- Jack Krupansky


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