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'MicroHoo': Moving From Marriage to Cohabitation?

By David Mitchell, SVP IT research at Ovum

When the Microsoft-Yahoo deal initially fell through, largely because Microsoft's Steve Balmer was unwilling to pay the high price that Yahoo's CEO Jerry Yang wanted ($33 versus $37 per share was the difference), Microsoft publicly walked away to pursue other strategic options. There was no "let's still be friends" statement from either party. Just when everyone hoped that the public debate over the potential marriage between Microsoft-Yahoo was over, the weekend saw two new threads of the long-running soap opera emerge.

“First was the news that a potential shotgun wedding could be on the cards. Carl Icahn, the well-known shareholder activist, has quietly built up a stake of around 4% in Yahoo. The intent is well telegraphed - to put pressure on the Yahoo board to reconsider its rejection of the Microsoft offer, either through direct pressure on the existing management or through forcing board changes within Yahoo. Microsoft would have been able to mount a similar proxy campaign but it chose not to, for fear of the damage to the company, its customers and its staff that would have been inflicted. A proxy battle, waged through a third party, has exactly the same risks. Of course, there is also the risk that Microsoft may simply be unwilling to return to the negotiating table or re-instate even its lowest offer - never mind the final one.”

“The weekend also brought news that Microsoft had raised the possibility of an alternative relationship with Yahoo - short of an acquisition. While it is not clear what the suggestion is, it is likely to involve a relationship or partnership around search-related advertising, in a similar style to the 'poison pill' type deal that Yahoo was suggesting with Google. There are several possible options, from a simple licensing deal at one end of the spectrum, through to a joint venture. Given the difficulties in pursuing an acquisition, it would be reasonable to assume that a low-integration option in any revised transaction is likely.”

“It's clear that both Microsoft and Yahoo see the rationale for some form of get together - in a word, Google. For Microsoft, Google poses a threat to both its online business and its traditional business application space - with Google dominating the former and now progressively making inroads into the latter, and with Google Gear breaking the online/offline dichotomy. For Yahoo, there is a need to increase share in the online advertising market and to diversify, bringing a range of application alternatives similar to Google Applications. Without the diversification Yahoo risks being progressively marginalised in the market - and accelerated research and development is needed in the short term.”

“When the Microsoft-Yahoo deal was first announced we saw strategic rationale in it for both parties, and that has not changed. Partnership may be easier to implement than acquisition, but is still not easy. Neither party can afford to put all of their bets on this transaction. Microsoft still needs to accelerate into the Asian online markets and to consider acquisitions in that part of the world. Yahoo still needs to increase the range of applications that it offers, either through organic development, through acquisition or through partnerships and co-development.”

“Marginalisation is a risk for them both.” /PR

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