I've had perhaps a dozen emails over the last several days asking what I think of Microsoft's offer to buy out Yahoo's shareholders.
So here's what I think - first on motivation and prospects.
Some mergers are defensive, some are driven by competitive opportunity, and others largely by management egos and investment bankers hooking for commissions. This seems to be one of the latter: Yahoo was over valued relative to its earnings potential before the deal, and Microsoft's 62% premium over the penultimate closing price seems absurdly over the top.
What I imagine (note "imagine" not "know") happened is that the change in Bill Gate's role at Microsoft gave some of the other senior players the opportunity to commit their supporters by ramming through a deal last researched sometime in September or October of 2007 - i.e. before what I think of as the "Soros dip" hit the market.
Next, on execution: I don't think Microsoft management can improve on Yahoo management - and I don't see any serious synergies with MSN either. Basically, Microsoft has two choices here: let existing management run the company in competition with MSN and Google, or try to make something new by merging Yahoo and MSN. Either way it's a guaranteed loser: if they don't try for merger synergies internal opposition will coalesce around that premium and the people behind the deal will eventually lose. If, however, they do try to create synergies from essentially nothing -the cost of running MSN is trivial relative to that $26 billion cash premium, I think the people involved will fight each other into the ground - pretty much the way the Compaq and HP people fought each other and in that process destroyed HP's entire pre-merger market value.
And, finally, on the relationship to Google. A lot of people are playing this as some kind of Microsoft response to google's growing market control. If so, it's a very uninformed and unthought through response.
Google is tremendously vulnerable - but not to Yahoo or MSN because its customer model is very different from theirs. People use MSN because it's a link to Microsoft, and they originally used Yahoo instead of Altavista because Yahoo offered classification based search instead of text search. Since then google blew Altavista away by offering a superior text search interface and Yahoo moved toward portal services and away from its original classification based search. As a result Yahoo's revenues are reasonably predictable - and it's a $20 share that's probably worth around $18 on the basis of its expected revenue flows.
Google, on the other hand, is almost totally dependent on its search engine's popularity - the data center stuff they're building isn't ready yet and certainly hasn't attracted its intended markets. Thus the reason I call it a $20 share when it's selling at well over $500 is just that I'm discounting its future revenues to account for the risk that someone starts up a better search engine - and simply takes away google's eyeballs before their time share services can take over as a revenue driver.
It wouldn't be hard - Sun's new ROCK gear will be available soon and offer the ability to handle half a million concurrent search requests on two billion documents - in memory and far faster than google's Linux grids can do it. More importantly, things that are hard for google to do precisely because of its distributed infrastructure -things like using reader credibility to assess search result credibility- will be easy to do on Rock. Basically google is a ballooning bet on the one thing we know never happens in this industry: stability - and because Yahoo isn't, this is either the dumbest anti-google strategy ever devised, or not an anti-google strategy at all.
So, bottom line? I think the best thing Microsoft's board could do is find a legal way to get out with minimal losses - and the most likely thing they'll do is destroy every cent of market value they're putting into Yahoo in an ego driven attempt to merge MSN into it.
of all of Yahoo's market value