Microsoft has decided to withdraw its unsolicited offer to acquire Yahoo!. The offer started at US$ 31 a share, valuing Yahoo! at US$ 42bn. Later this offer was increased to US$ 33, or roughly US$ 46bn.
Microsoft shareholders, be happy about this outcome. It did not make sense in the first place. It was a reaction to the fact that Google is the de facto standard for web advertising, where Microsoft has tried to play catch up for some time with few successes so far. So why would Microsoft make a US$ 42 or 46bn bet on Yahoo! when it knows that most acquisitions fail? It makes even less sense when considering the following:
1. What would stop key staff from departing? How many at Yahoo! would rather work for Microsoft? Bear in mind that Silicon Valley has a very high turn over in general, and talented staff will easily find something else to do, either on their own for example for one of the many social networking sites that are constantly created over there.
2. There are actually few areas where Yahoo! actually excels. Its advertising business is struggling against Google (they are even looking into how to outsource advertising to Google). Its photo sharing service is an acquisition business (when they bought Flickr.com). Its mail service is nothing to brag about compared to the competition, likewise for news. A strong Yahoo! domain is it games business, but aside from that there are few shining stars at Yahoo!.
3. How would Microsoft merge the two companies? How would it manage the different cultures, while ensuring that key staff would not flee the ship?
Merging two under-performing advertising platforms does not create a stellar platform.
The rational for this acquisition has often been cited to merge two advertising platforms in order to compete better against Google. However, there is no reason why this should all of a sudden turn the tide and put Google on the defence. Quite contrary, since if this acquisition had gone through there would have been an upheaval period, where Google could continue to solidify its position has "Microhoo" hammered out its inner workings. Bear also in mind that Yahoo!'s main advertising business comes from its own sites; its affiliate business in decline. In the latest quarterly releases Yahoo! reported US$ 966m revenues from marketing services on its own or operated sites, up 18% compared to 2007. If we look at its affiliate business however, it was down 7% to US$ 606m. Something worth while US$ 46bn, given all the associated risks? It also gets worse since many of Yahoo's own services compete against Microsoft services, hence it is likely that Microsoft would merge certain services where users could migrate elsewhere.
If Microsoft is so eager to burn money to get into the advertising business, why not just acquire the rights to power search and advertising for Yahoo! services? That must surely be cheaper, easier, and more feasible to do -Google is about to do this. Microsoft would not have to take on Yahoo staff and its services, and it would not have to go tete-a-tete with Yahoo's board and senior management team.
If this acquisition had gone through, business schools in the future would, in my opinion, have a new case study, aside from TimeWarner AOL, on how large scale acquisitions often fail and do not make business sense.
