Local synergies hard to gauge in the Microsoft and Yahoo deal
- 02 February, 2008 22:00
Microsoft's hostile offer for lagging internet portal Yahoo! has significant implications for the local internet landscape. In Australia, Microsoft's online arm is represented by ninemsn, a 10-year-old 50-50 joint venture with former Packer group PBL Media. Ninemsn is the No. 1 internet destination in Australia, helped by its use of the HotMail brand webmail service, which lands people automatically at ninemsn when they log into or out of the mail service.
Yahoo! has a younger, two-year-old deal with Seven Media, called Yahoo!7, which is 50 per cent owned by private equity group Kohlberg Kravis Roberts. PBL Media is 75 per cent owned by private equity group CVC Asia Pacific, and James Packer retains the remaining 25 per cent. Two weeks ago, News Ltd scion Lachlan Murdoch took a 50 per cent stake in Mr Packer's share of PBL Media.
Local representatives of ninemsn and Yahoo!7 were unable yesterday to comment on any ramifications for their respective companies if the proposed takeover went ahead.
In a conference call, Microsoft chief executive Steve Ballmer said the takeover would represent significant synergies, and allow for savings of $US1 billion-plus a year.
"Together, Microsoft and Yahoo! can offer a credible alternative for consumers, advertisers and publishers," Mr Ballmer said. "Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition."
That player is Google, which dominates the search market and the online advertising market. Searches using Google's search engine represent around 55 per cent of all internet searches conducted. Yahoo! and Microsoft both have single-digit shares of the search market.
The key question for the local market, which is also dominated by Google in both search and advertising, is what would happen to the two joint ventures between Microsoft and PBL Media, and Yahoo! and Seven Media respectively. Aside from having their own infrastructure and sales and marketing teams, the deals represented by the tie-ups between the private equity companies and the online components would be difficult, if not impossible, to untangle. A likely outcome is that the entities would be left alone while the parent companies, Microsoft and Yahoo!, deal with integration issues between the two companies.
Microsoft's offer of $US31 a share represents a 62 per cent premium over Yahoo!'s closing price of $19.18 on Thursday, a far cry from its peak of $118.75 right before the dotcom crash.
Yahoo! has consistently struggled with strategy. Many of its projects, including Project Panama, a revamp of its online advertising engine, have run over time and over budget. Panama was a year late, and so far has proved unable to make a dent in the Google juggernaut.
Yahoo! remains the No. 2 online destination after Google, and the No. 2 player in the online advertising market.
Microsoft is a distant third. A combination of the two companies could, as Mr Ballmer said, make a compelling No. 2 competitor to Google, which recently gained approval from the US Federal Trade Commission to take over online advertising display company DoubleClick in a multibillion-dollar deal.
Microsoft has tried to get a piece of the display ad action too, by acquiring aQantive, which also places display ads, for $US6 billion. But again, this strategy has failed to make a dent in Google's momentum.
If the Microsoft takeover of Yahoo! goes ahead - and there is talk of News Ltd putting together a syndicate to offer a rival deal - there are significant hurdles that both companies will need to overcome in order to deliver the promised synergies.
First and foremost is technology. Yahoo! has built its systems using open-source technology; Microsoft's technology is proprietary.
Then there are cultural and staffing issues to overcome.
Will the takeover lead to large cuts in the workforces of both companies as they seek to reduce duplication?
Yahoo! also remains an online company while Microsoft, despite its efforts to compete with Google, has a culture that is firmly entrenched in desktop and server software engineering.
Disparate cultures such as Yahoo!'s and Microsoft's don't always mesh, raising questions about whether the annual savings of $1 billion could be achieved.
The most likely outcome is that Microsoft will win Yahoo!, but that both companies will struggle with the integration issues that go alongside any deal of this magnitude.
It's the first time in Microsoft's 32-year history that it has launched a hostile takeover of another company, and questions remain about whether it has the capacity to deal with the issues that such a takeover will bring.
If it fails to properly integrate and takes its eyes off the ball, Google's dominance will grow even further.
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