Friday, May 04, 2007

Microsoft & Yahoo Merge? You've Got To Be Kidding

It's all over the business news today. Microsoft and Yahoo are in formal talks, allegedly via Goldman Sachs, to merge.

The pundits are on the air, waxing eloquently about this putative deal. Per my earlier post, here, nobody whom I've heard has the courage or temerity to bluntly assess just how awful this combination would be.

To clarify, let's state what is supposed to be the obvious: Microsoft and Yahoo have both failed miserably, over the past few years, at competing with Google. The first Yahoo-sourced chart (please click on the chart to view a larger version) demonstrates this. It's a two year view of Google, Apple, Yahoo, Microsoft and the S&P500 Index. Since these are all technology stocks, it's reasonable to view the price chart as a very good approximation of a picture of total returns.

The picture is clear- Microsoft and Yahoo haven't even been able to beat the index over two years, even with the former's pop from releasing the new Office and Vista software systems. Yahoo has actually declined in value. In contrast, Google has been doing much better, with a slight flattening since early 2006. I have included Apple as an example of a transformational technology company's potential performance. This is what one would presume MSFT/YAHOO aims to mimic.

Looking a little further into the past, here's a five year Yahoo-sourced price chart of the same entities. This time, Yahoo looks better, but both it's and MSFT's performances have clearly flattened in the past several years. Neither looks to be an engine of value-creation that is primed to rival Google.

However, to do so, on Google's playing field of online value-added services, several questions need to be considered.

First, doesn't one of the partners usually have to be successful already for this sort of combination to work? Remember the Time Warner/AOL merger? AOL turned out to be more fragile than expected, while TW was stuck in neutral.

In the case at hand, Microsoft still dominates a rather unexciting sector- PC software. Online-based software is the hot item. Oh, right. Google does that already. Meanwhile, as I've written so many times (search my blog for, or click on the label for "Yahoo."), Yahoo is the 'used car' of the internet. It's not a standout for anything. This recent post, just over two months ago, details my views on some of Yahoo's strategic mistakes. With neither MSFT, nor Yahoo in a position of superiority in a relevant product/market which competes with Google, I think this combination fails the test of having at least one partner actually being successful.

Second, why would a merger of these two huge, lumbering companies create more than a more focused, nimbler marketing alliance agreement between the two? The latter would be far more likely to succeed, in my opinion. These two technology giants are already past their prime and too sluggish to have a high probability of combining in a manner that can yield a consistently superior total return performer. The companies are not similar in their product/markets, so there won't be much in the way of cost savings, yet they will spend considerable time and money attempting to mesh and reorganize post-merger. I suspect it is a recipe for disaster.

Third, Yahoo is, in my parlance, the 'used car of the internet.' This is going to be Bill's/Steve's new ride? Hardly an inspiring last act for the software titan. Can't they do better than a bumbling online-oriented hodgepodge of businesses mismanaged by a former entertainment executive?

Fourth, together, these two still probably won't catch Google. It's not about the's about the ideas. Neither has shown themselves capable of generating successful new ideas which have driven consistently superior total returns in the past five years. How will just mashing the two mediocre firms together change that?

Lastly, as one pundit reminded me, there is US anti-trust regulation and the EEC's animosity for all things MSFT. Thus, he felt that perhaps all that will result is some sort of marketing venture.

Actually, that might be a blessing. But I still feel that there's precious little the two can conceive and execute in time to affect Google's hegemony in areas that matter in the next two years.

As a parting view, here's a Yahoo-sourced chart of the five data series over roughly the past decade. While Yahoo is the second-best value creator, it's been sliding for several years, with an overall erratic pattern. Apple, for example, reflects what a radical product/market transformation would resemble, and neither Yahoo nor MSFT remotely looks like this. Instead, MSFT has been flatlining for over six years. Just looking at the chart suggests a dynamism in Google and Apple that Yahoo and MSFT now lack.

If this combination materializes, I will go on record predicting that it will not result in a firm that can regain a pattern of consistently superior total return performance. It will, over time, fail shareholders, relative to their option of simply buying the S&P index.

No comments: