Microsoft ( MSFT) would do well to recall the ancient proverb: Be careful what you wish for. You just might get it. The Redmond, Wash., software giant's $44.6 billion bid for Yahoo! ( YHOO) will face "enormous execution issues," if it succeeds, Directions on Microsoft analyst Jeff Parker said Friday. "My mind reels from the complexity." But the move "shows how serious they are about competing with Google ( GOOG)," Parker added, speculating that Microsoft is trying to preclude Google from acquiring Yahoo!.
Cramer: Microsoft and Yahoo! - Woo-Hoo!
The integration of the two companies poses great problems for Microsoft, "which has had difficulty integrating acquisitions before -- Great Plains being most salient example," Parker said. Microsoft acquired the maker of business software in 2001. Both Yahoo! and Microsoft have large, diverse Internet services and advertising properties that make any integration of the two firms a monumental task. "There are so many redundancies," Parker said. To eliminate overlap and get scale, Parker suggested Microsoft will combine data centers and the advertising platforms. "That's going to get them better efficiencies." Microsoft just bought its primary ad platform in 2007, with the $6 billion acquisition of aQuantive. But Yahoo!'s ad platform has been considered the stronger of the two, Parker said. And Yahoo! made a great investment in paid search with its 2003 acquisition of Overture, which would ultimately be a boon to Microsoft, Parker said. Expected to lead the integration effort is Kevin Johnson, head of Microsoft's Platforms and Services Division. Former aQuantive CEO Brian McAndrews continues to head up that unit of the platforms division and would ultimately be responsible for much of the integration, according to Parker. Yet, given that Johnson is in charge of Windows Client software development, the corporation may need "to parse off Windows development" to another division, Parker speculated. Johnson "may have too much on his plate with this. " Microsoft already had a redundancy conflict between its home-grown advertising platform and aQuantive's. The addition of Yahoo!'s platform will compound integration issues, said Matt Rosoff, who is also with Directions on Microsoft. "The integration point is going to be at the level of the marketing dashboard that they offer to advertising agencies that gives them access to these wide services under the Microsoft and Yahoo! umbrella," said Andrew Frank, vice president of research at Gartner. Some of Yahoo!'s businesses will continue to operate autonomously, as aQuantive's AvenueA/Razorfish agency does now, Frank added. Unlikely to get merged are some services popular with consumers, like email, Rosoff speculated. Consumers often have accounts at multiple email services. In the tradeoff between Hotmail and Yahoo! Mail, Microsoft could double some of its user accounts by retaining both services. And combining the services wouldn't yield cost efficiencies, he said. "There is no reason to alienate consumers who prefer one over the other." But where Microsoft's content overlaps with that offered by Yahoo!, costs do matter. And the lesser would probably be discontinued, Rosoff said, noting that Yahoo! Finance is considered the leading financial portal, much stronger than MSN's. Gartner's Frank said he doesn't expect tight integration between the two corporations. "I think scale comes from the access Microsoft is going to get from advertising and audience inventory, and not so much through tight integration and reorganization."
Mahoo, Yicrosoft, Mirco Who?
"Both companies face an uphill battle in the Internet search market, whether they merge or not," Technology Business Research analyst Allan Krans wrote in an email Friday. "But a unified front may be the best option to challenge Google's dominance in the space." Although Yahoo! CEO Jerry Yang may be reluctant to embrace Microsoft, the company's struggles and uncertain growth prospects may finally compel him to accept the offer, Krans stated.
"We believe Microsoft's timing is intelligent," Mark Murphy, analyst with Broadpoint Securities, wrote in an email Friday. Microsoft's patience in waiting "for Yahoo! to stumble with management changes, turnover and strategic setbacks," gave Microsoft a better price opportunity. The company is "making this bid on the heels of a month in which Microsoft gained Internet search market share vs. Google, which is a rare feat, Murphy added. Yet Wall Street speculation is running rampant that Microsoft's bid, a 62% premium over its price Thursday, won't be good enough to close the deal. Although Krans expects shareholders to pressure Yahoo! to accept the deal, Microsoft ultimately will have to come up with a higher offer price, "considering Yahoo! shares were trading above $30 per share just three months ago and that Yahoo! believes its unconsolidated assets are worth in excess of $10 per share." The offer price is about 17 times earnings before interest, taxes, depreciation and amortization, according to Kirk Materne, analyst with Bank of America. Given that buyout multiples in the Internet sector have historically ranged around 23 times EBITDA, "we believe Microsoft has some room to ratchet up the price," he wrote in a note Friday. Microsoft is an investment banking client of the firm. It will be hard for either Yahoo! or Microsoft to make headway in the online search market in 2008 as standalone companies, according to Krans. "A combination of Microsoft and Yahoo! may be the only way to present a serious challenge to Google in the Internet search market." Combined, MSN and Yahoo! could reach 600 million users and perform 28.3% of all searches, JPMorgan analyst Imran Khan wrote in a Friday note. Yahoo! is an investment banking client of the firm.