However, let's take a look at Microsoft's revenue breakdown (these numbers are from their most recent 10-K):
(read "Client" as "Windows" and "Business Division" as "Office")Sure, acquiring Yahoo could provide some momentum to the flat online services revenue curve. But this is still a pretty small slice of Microsoft's revenue pie. Even more telling is this breakdown of operating income, reminding us that a vast majority of the money Microsoft makes still comes from Office and Windows, and the rest from their enterprise business.
Alright. Now, I just finished Nick Carr's new book, The Big Switch, and I have to say that his arguments and technological sophistication have become admirably nuanced. This is a prescient read, one I'd recommend highly. So, let's say we're evolving towards a (distant) future in which a lot of basic IT infrastructure moves to massive computing grids. Microsoft has deep (although perhaps not all willing) customer loyalty in the PC world, and an impressive revenue stream (~$11B) from its server customers. If they're thinking ahead about a future in which this software is delivered over the Internet, wouldn't an ideal acquisition be a company with deep and diversified consumer relationships in the online world? And with technological sophistication and experience in delivering rich computing experiences over the Internet? Frankly, to me this sounds a lot like Yahoo! (which, Google aside, is one of the most Internet technology-savvy companies there is). Yahoo! is the online truly diversified portal left standing. It has an impressive range of properties that engage it's consumers. And notice the technological leadership it has taken with Hadoop.
Perhaps some of this is speculative thinking. And maybe the specter of a Google-owned online advertising world is part of the short-term motivation for the acquisition, and maybe online advertising will be the revenue engine for specific kinds of consumer software in the near future. But to me, this merger (which seems like it will happen) won't just be about search. It will determine who owns and controls future consumer and enterprise computing.
12 comments:
Besides Yahoo's impressive profile second to Google, a point worth noting is that Yahoo's shares are the lowest in years! That makes it an attractive acquisition target. They were down from $35 last Nov to about $19, when MS made the offer at $30, about 60% premium. Being in the same industry, MS could definitely extract value through synergies and growth from this acquisition. Cloud computing will assume a central role in IT world as per Microsoft's article in Financial Times (Feb 24).
http://www.ft.com/cms/s/0/013a4f44-e2f2-11dc-803f-0000779fd2ac.html
Yahoo seems to be a good candidate to leverage its capabilities in this growing market. Lastly, Yahoo seems be running out of anti-takeover defenses. Seems like MS got the timing right.
absolutely. thanks for the link to the FT article. and they will have one soon, just as Steve promises.
... I would like to post three statements in regards to the YHOO/MSFT deal:
1. From a business perspective if you analyze MSFT portfolio and potential synergies it would make more sense to them to buy either Nintendo or a company like SAP.
2. From a Value Perspective the Market showed that the acquisition made no sense. One day after the offer the joint Market Value of MSFT+YAHOO went down by 7.2 Billion Dollars. January 31st MSFT + YHOO were worth 330 billion. After the announcement went by YHOO rose 40% and MSFT dropped making the joint valuation USD 323 billion.
3. Last but not least if you take MSFT vision of "enabling people and businesses throughout the world to realize their full potential" it might make sense if MSFT sees that the future trend comes from grids.
I tend to partially agree with Rajendra's comment in that Microsoft's marriage proposal to Yahoo certainly has short-term business benefits, taking advantage of Yahoo's weakened bargaining power, and in search of a bigger stake in the online business market. In the long-term, Nicholas Carr's vision of the world wide computer seems to be taking gradual hold in my opinion; and this I'm convinced is what’s keeping Microsoft's executives awake at night.
Microsoft clearly needs to position itself and define its role in the emerging trend toward utility computing. Early signs of this trend are becoming visible through Amazon's commercially active online storage and processing business model, and availability of Google's online business productivity applications e.g. various collaboration tools. This will surely redefine computing economics in the future.
Drawing on Nicholas Carr's controversial views of the commoditization of IT and lately, his thoughts on utility computing...I would venture a daring position by envisioning a future world of Operating System(OS)-agnostic devices and peripherals, where all that matters is access to information, processing power and remote storage via semi-dumb terminals (the old days are back! The more things change, the more they stay the same).
A little digression from IT Strategy to finance:
To add to Nicolas' statements, the market definitely did not see any value in the deal. First, a 61% premium is too high. Second, even with $1B of annual synergies, its not possible to achieve $342B of combined valuation that MSFT claims. There are other factors such as antitrust issues, integration and cultural issues that would reduce the valuation. By making such an aggressive offer MSFT must have indirectly revealed information that their Internet business was not as successful as the market perceived it, and hence it desperately needs YHOO. The Market must have realized that MSFT's own valuation of $298B was high in the first place, and hence punished MSFT to the tune of $7B.
On the other hand, MSFT definitely saved about $15B by not buying YHOO last year at $41 a share. Assuming that the bankers advising MSFT have done their homework they must have considered all these factors and the subsequent fall in valuation before offering a $31 deal to YHOO.
I feel that this move was necessicated out of both -- shrewdness and desperation. As we can see, the online business revenue of Microsoft is not going anywhere and similarly Yahoo has been in doldrums for almost ever now.Their heavily touted, Panama search technology couldn't really make a dent in Google advertising revenues. Both the companies realize that they can't compete by themselves against Google in the online world and thus they need to combine. I feel YHOO wants to go ahead with the merger but its looking to wring more money out of the transaction. Obviously GOOG can't combine with YHOO, not that it needs to, b'coz of antitrust issues. I feel this transaction will pass muster with the regulatory authorities. YHOO's online strength combined with MSFTs money power should make it an interesting combination.
I agree with rajendra's initial comments about Microsoft's abiltity to extract value from the synergies from the aquisition of yahoo. There is definately tremendous growth potential as well as the potential to compete with Google although that will be extremely tough. Microsoft's optimism was expressed in a recent article:
http://afp.google.com/article/ALeqM5iRwiTexlfQxrBA-f1sjxuCWSnzqQ
Microsoft may not be able to topple Google in the search arena with this acquisition, but since search is definately not the beginning and end all of the Web, Microsoft's strategic play will position it to be a pivotal player in this ever changing frontier where innovation is key.
I have a few comments, as follows:
1. Microsoft's offer for Yahoo has send signals in the market that MS has no further innovations to offer; it is lacking fresh ideas, and is looking to acquire an incumbent to propel further growth, or stall future decline.
2. Yahoo's only poison pill was to refuse the merger; if they start to look for a white knight, they would be susceptible to being acquired, at a fair market price and auction. It remains to be seen what action YHOO takes.
3. There is a good chance that the merger may pass the US Antitrust approval; but, it remains to be seen how the EU will respond to this merger. Remember that EU had recently slapped a $1.3 billion dollar fine on MS for breach of 2004 rules.
I agree with most comms previously made which seems strange as some are contradicting but I believe that's not the case. If MS bought Yahoo to establish itself as a search leader and take over Google and his revenue scheme, which I believe is the general view of the market, it is clear to me that their overall value would decrease. On the other hand I see this merger as MS strategy to protect its cash cow businesses, Office, Windows, and Bus solutions long term. With Google pushing for open standards MS latest XML "open std" is not really open)
OOXML booed by google and grid computing knocking on business doors MS better establish itself as a web apps leader before it's too late.
I was wondering on why exactly Microsoft wants to acquire Yahoo. Is it simply to have the brand name and traffic from Yahoo, or is it to accelerate it's chase of Google. If the latter were the case, why would Microsoft settle for second place technology and skill? If I wanted to be #1, why would I want to acquire the skills that are only #2 in the industry. I think Microsoft acquiring Yahoo will help, but the knowledge and management prowess to be #1 in the industry lies with only one company in the industry - that is Google. To develop long term strategy and growth competitive with Google, I would think Microsoft would rather steal a few key technologists from Google who know how to manage the technology vs. buying a second place business.
The most powerful claim seems to be that Google needs Yahoo in order to protect the majority of of it's business: Windows and Office. Microsoft would be better served by developing whatever it needs to compete in house. Microsoft's business relationships, online user base, and capital are enough to move into space. I disagree to those who say Microsoft cannot "innovate" into cloud computing or SAAS. It can and should be done in-house or via smaller, more targeted acquisitions.
Some of you were concerned about the decrease of competition in the on-line services business and the potential legal issues of the antitrust law against Microsoft’s monopoly. Although it is hard to speculate over the legal issue of US and UE commission, I believe this acquisition can actually increase competition in the marketplace that so far has been dominated by Google only. After the acquisition, the number of players can decrease, but the pressure on Google may stimulate additional innovation.
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