To Combat Google, Microsoft Bids $44.6b for Yahoo

Can two Internet failures – Microsoft and Yahoo – become successful when they come together?

We doubt it.

After failing badly in its efforts to take on the Google juggernaut, Microsoft has made a desperate $44.6 billion offer to buy struggling Internet pioneer Yahoo.

We think Microsoft’s proposal is heck of a bad idea. What does Yahoo really bring to Microsoft? Not much, when you stop to think of it.

Following far too many missteps, Yahoo is floundering and its CEO and co-founder Jerry Yang has shown no signs so far that he can do a Steve Jobs on the company.

Google has overtaken Yahoo and Microsoft in both search and in monetizing the page views from search through key word advertising on Google and its affiliates (via the AdSense program).

In our view, the main issue is that the quality of search results on both Yahoo and Microsoft is inferior to what Google offers. That has led most people to stick with Google.

Microsoft argues that the proposed acquisition of Yahoo will give consumers, advertisers and publishers a credible alternative to Google. We remain skeptical of that claim. Perhaps, Microsoft should invest its resources on the next frontier – the mobile arena.

Despite investing billions of dollars, Microsoft’s MSN/Live search engine struggles to gain user acceptance in the face of a far superior service from Google.

When you look back, MSN Search is not the only Microsoft failure on the Internet side.

In fact, the history of Microsoft’s Internet initiatives is littered with the carcases of failures – online advertising, MSN Internet access, CarPoint, MSFDC bill presentment and payment service, LinkExchange Banner Network, HomeAdvisor home buying service, Passport Express Purchase online shopping service, Electronic Wallet, MoneyCentral and more.

Microsoft is dreaming that the combination with Yahoo will create a more efficient company with synergies in four areas:

* scale economics driven by audience critical mass and increased value for advertisers.
* combined engineering talent to accelerate innovation.
* operational efficiencies through elimination of redundant cost.
* and the ability to innovate in emerging user experiences such as video and mobile.

Microsoft hopes these four areas will generate at least $1 billion in annual synergy for the combined entity.

Come on, if the engineers at Yahoo and Microsoft separately have not been able to come up with better search algorithms to beat Google, we doubt that they’ll succeed by just pooling their efforts.

Microsoft’s offer represents a 62% premium to the closing price of Yahoo’s shares on Thursday. 

In a letter to the Yahoo board on January 31, 2007, Microsoft CEO Steve Ballmer wrote:

Microsoft’s consistent belief has been that the combination of Microsoft and Yahoo! clearly represents the best way to deliver maximum value to our respective shareholders, as well as create a more efficient and competitive company that would provide greater value and service to our customers. In late 2006 and early 2007, we jointly explored a broad range of ways in which our two companies might work together. These discussions were based on a vision that the online businesses of Microsoft and Yahoo! should be aligned in some way to create a more effective competitor in the online marketplace. We discussed a number of alternatives ranging from commercial partnerships to a merger proposal, which you rejected. While a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo! that we are proposing.

The only way to combat Google is through better technology. Not by the combination of two Internet losers.

All monopolies are bad for consumers. And the Google monopoly is not likely to be any different.

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