Analysis

Microsoft and Yahoo regrets? Maybe not

Sure, things look rough for Yahoo Inc. and Microsoft Corp. now that they couldn't agree on a deal. Yahoo's stock has cratered, and Microsoft has to figure out another way to catch up in the online ad market, a flaw so big it was willing to pay $47.5-billion to fix it.

But in the long run, Yahoo's rejection of Microsoft's acquisition offer could turn out to be brilliant for both companies. Sometimes the best deals are the ones you don't make, especially in technology, where big mergers and acquisitions are notoriously difficult.

Instead of turning into the next AOL Time Warner — a deal regretted enough that the acquirer's name, AOL, eventually was dropped from the corporate title — perhaps Yahoo and Microsoft will be like other companies that were better off after their proposed linkage got scuttled.

Take, say, Comcast Corp. and Walt Disney Co. When Comcast spent two months of 2004 pursuing Disney in a bid originally valued at $54-billion, the cable company was chasing the notion that it needed to be an owner of entertainment content, not just a distributor.

After Disney sought to stay independent (like Yahoo) and Comcast's shareholders were dubious about the high price (like Microsoft's), Comcast dropped the bid, saying that focusing on distribution wasn't so bad after all.

Disney ended up revitalizing itself by making its own acquisition, of a more natural partner, Pixar Animation Studios Inc. Meanwhile, Comcast settled for a slice of the MGM studio and ownership of smaller content producers like the E entertainment cable channel, and it has been able to concentrate on competition from telecommunications companies encroaching on the cable business.

Given that Microsoft sought the gigantic tie-up with Yahoo in hopes of better challenging Google Inc. in online search and advertising, Microsoft should be glad it stepped away from buying business softwaremaker SAP AG in 2004. That wouldn't have prevented Microsoft's Internet problem, and it likely would have caused regulatory and operational headaches.

For its part, by pursuing a separate path — including smaller acquisitions of its own — SAP has its shares higher now than they were in 2004.

Of course, it's difficult to know how differently things would have turned out if these and other unfruitful tech merger talks had succeeded.

Quite often, the cultures or product lines are so hard to combine that the perceived advantages of mergers and acquisitions dry up quickly. That's one reason why Forrester Research CEO George Colony called a potential Microsoft-Yahoo deal "a disaster."

At very least, if Yahoo and Microsoft aren't better off apart, then they may be no worse off. And, if Yahoo fails to improve the company's fortunes, or no other suitor emerges, Microsoft and Yahoo still could end up mating after all.

Yang's tough day

Yahoo Inc. CEO Jerry Yang, who owns about 54.1-million shares of the company's stock, ended the day $232.7-million poorer in the first day of trading after Microsoft Corp. withdrew its $47.5-billion takeover offer. Microsoft CEO Steve Ballmer abandoned his bid Saturday after saying he didn't want to pay the $37 a share Yang and Yahoo's directors demanded for the Internet company. Yahoo fell $4.30, or 15 percent, to close at $24.37 in Nasdaq trading Monday, the stock's biggest drop since July 2006. Microsoft, the world's largest softwaremaker, lost 16 cents to $29.08.

Bloomberg News

Microsoft and Yahoo regrets? Maybe not 05/05/08 [Last modified: Thursday, October 28, 2010 1:38pm]

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