These big business mergers make me nervous.
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Microsoft in Early Talks With Yahoo
May 4, 2007, 1:00 pm

Microsoft has made a preliminary overture to Internet giant Yahoo, and the two companies are in very early discussions about a joint venture that could extend to a merger, according to people briefed on the talks. The discussions, reported in Friday’s New York Post, are not new, but part of an ongoing dialogue that the two companies have been holding for more than a year, these people say.

Microsoft and Yahoo have previously considered some kind of combination, including the sale of a stake in Yahoo’s search business to Microsoft, but failed to come to terms. The latest conversation could easily meet the same fate, as integrating cultures, personalities and technologies at the two firms would pose serious challenges. Some kind of a partnership, possibly involving Yahoo’s new advertising platform, may be a more realistic outcome.

Shares of Yahoo were up more than 16 percent to $32.86 in early-afternoon trading Friday. Microsoft shares were down 1.7 percent to $30.45.

Microsoft officials said Friday they would not comment on speculation about a merger between the two companies. However, a person who had been briefed on the companies’ ongoing discussions said that a “creative partnership” was a possibility. One option that had been discussed was the linking of advertising networks to generate additional Web traffic, according to a person briefed on the talks. Another possibility might be an Internet-only partnership, rather than an acquisition, this person said.

This person added that there had been no recent acceleration in the talks.

A Yahoo spokeswoman said the company does not discuss “rumors and speculation.”

An outright acquisition by Microsoft may encounter resistance among Yahoo executives who perceive the company’s single focus on the Internet to be one of its strengths. They could be wary of becoming part of Microsoft, a much larger company whose No. 1 business remains software.

Still, a combination of the two companies’ online business would present a potentially powerful counterweight to Google’s dominance of the online search and advertising market.

In March, Heather Bellini, an analyst at UBS, said that buying Yahoo would “improve Microsoft’s position dramatically as well as alter the competitive dynamics of the search industry.” But Ms. Bellini also suggested that acquiring Yahoo could create “potentially unmanageable risks” for Microsoft. Attempts to integrate Microsoft’s advertising platform with Yahoo’s could falter; key employees might jump ship. With all these potential problems, Ms. Bellini said a partnership, as opposed to a merger, between Microsoft and Yahoo could be a better plan.

On Friday, however, Benjamin Schachter, also an analyst at UBS, said he had grown “incrementally more bullish” on a possible merger between the two companies, “given there are so few quality Internet assets available and no shortage of money or strategic buyers looking at the space.”

Over the past few years, Google has steadily increased its share of all the searches conducted online. In contrast, Yahoo’s share has held steady over the past year, while Microsoft’s has slipped, despite heavy investments to improve its search technology. As of March, Google accounted for 54 percent of all online searches in the United States, more than double Yahoo’s 22 percent and more than five times Microsoft’s 10 percent, according to Nielsen/NetRatings.

Of every $100 dollars spent in online advertising in 2006, Google took in $25, while Yahoo got $18 and Microsoft received less than $7, according to eMarketer, a research firm. And Google’s dominance is expected to grow: the search giant is expected to capture 32 percent of online ad dollars this year, eMarketer said.

Both Yahoo and Microsoft were interested in buying DoubleClick, the online advertising services company, before Google swooped in with a winning $3.1 billion bid. The deal, which is expected to strengthen Google’s online dominance even further, has been criticized by Microsoft and others, and may
have been a catalyst for the renewal of talks between it and Yahoo.

Yahoo and Microsoft each own rival Internet portals that cater to users with an array of services, ranging from news and entertainment to e-mail and instant messaging. Yet the two companies have a long history of
partnerships. Most notably, Yahoo provided search and advertising services to Microsoft until last year, when the software giant deployed its own search service.

Next week, Microsoft is hosting an annual two-day summit for online advertisers in Seattle at which Yahoo’s chief executive, Terry Semel, is scheduled to give the closing keynote speech. Mr. Semel appeared at the same event two years ago, and his appearance this year has been scheduled for some weeks.

Despite continued skepticism on Wall Street, Yahoo executives in recent months have sounded increasingly confident about the company’s prospects. They have said repeatedly that a new advertising system, dubbed Project Panama, was performing well following its rollout in February and would start delivering improvements to Yahoo’s bottom line later this year.

The company has also made significant moves to expand its online advertising business beyond its own vast array of Web sites. On Monday, it acquired Right Media, an advertising marketplace used by about 1,000 online publishers to sell advertising space in real time. It has signed deals to sell graphical ads on sites such as eBay, Comcast and a consortium of publishers representing more than 260 newspapers.

Yahoo is no small target; it has a market capitalization of about $44 billion. A deal for Yahoo would be the largest ever attempted by Microsoft, whose market cap is about $290 billion. And the very different corporate culture at the two companies has long been cited as a major reason such a deal may not work.

In an interview with the New Yorker last year, Mr. Semel, a former film industry executive, swatted down the idea that Yahoo had considered an outright sale to Microsoft. Instead, he said that they tossed around the notion of Microsoft buying a stake in Yahoo’s search business — a transaction that he compared to an amputation.

Henry Blodget, the former Internet stock analyst who runs the Internet Outsider blog, wrote Friday that combining Microsoft and Yahoo’s search businesses would be a smart strategic move. But from a corporate culture standpoint, it would be disatrous, he said. The Internet has always been a secondary focus at Microsoft, whose cash cow is the Windows operating system and its suite of applications. “If Microsoft buys Yahoo, Microsoft should immediately spin the Yahoo-MSN business out as a separate company,” Mr. Blodget wrote. “If it doesn’t, both Yahoo and MSN will die.”

http://dealbook.blogs.nytimes.com/2007/ ... -of-yahoo/