The creator of the law of unintended consequences must have had the scramble to merge with or buy Yahoo! (NASDAQ: YHOO) in mind. Google (NASDAQ: GOOG) gets daily benefit from the fighting and should garner an additional edge over the next year or two.
The professors who pen business school text books from their campus offices at Harvard and Wharton are in agreement that mergers rarely work. The list of reasons is always long. Distractions. Culture clashes. Poor estimates of savings. And, the most lame-brained of all–synergy.
The Microsoft (NASDAQ: MSFT) ideas for buying Yahoo! at a price well above the market may have turned out to be brilliant. Redmond is a lap down in the race to be a big internet player. Buying Yahoo! would put it into the No.2 spot in search advertising and the first place for inventory in the online display ad space. There were certainly plenty of people to fire, so the odds of savings were fairly certain.
Microsoft’s great risk is that all of the employees at Yahoo! keep voodoo dolls with Steve Ballmer’s likeness. They spend their idle time putting pins into the little totems. But, the Yahoo! board and management must know, in their less guarded moments, that remaining as an independent company is not a fabulous option. They have as much as said so to the world by asking Microsoft to raise its bid. Put more cash on the table and all will be forgiven.
Enter Time Warner (NYSE: TWX). It would like to find a home for AOL. Not unlike Yahoo!, it would benefit from more scale and more ad inventory. Cutting costs in putting the companies together is almost certain. And, Time Warner might put in some capital for Yahoo! to buy-back shares. Angry Yahoo! investors not getting $31 from Microsoft could still have their palms greased.
None of that was enough grist for the media and Wall St. analysts. Microsoft has been talking to Rupert Murdoch, king of News Corp (NWS), about putting his large social network, MySpace, into a combined MSN/Yahoo! property. The number of online pages available for advertising, if such an entity were created, would be beyond counting. People would be fired. Money would be saved. The fact that Mr. Murdoch cannot make any money on his big social network will have been lost in the fog of war.
Each of these maneuvers costs the firms involved millions of dollars in legal and investment banking fees. Much, much more important, the most senior executives at these companies are dragged into endless strategy meetings, all at a time when the economy is in recession and the growth of internet advertising is at risk. If any of the combinations being contemplated becomes a reality, senior staff will be tied up for months trying to make the deal work.
Over at Google (NASDAQ: GOOG) management has not broken a sweat. They will not be buying anything. Eric Schmidt, their CEO, may have had one or two conversations with Yahoo!. He has told them that they can test his search advertising product to see if it works. If Yahoo! elects to use it, Schmidt’s company makes hundreds of millions in commissions and, in effect, it will have co-opted its only real competitor in search. The Justice Department may have something to say, but it will be Yahoo! attorneys who handle that. Google is already a de facto monopoly. It does not need to tell the government that adding Yahoo! to its client list makes that worse. The staff at Justice is either in or out. If nothing happens,Yahoo! will still only have 20% of the US search market when it is all over. Unless, of course it accepts Microsoft’s $31 bid.
Often, the best thing to do in business is nothing. Let the competition make most of the moves. Expend little energy. Stick to the present path and keep management managing.
Google will not spend a nickel on the Yahoo!. imbroglio. If one of the companies involved comes to it to outsource search, Google gets some extra money. If not, it can watch a merger eat up the time and energy of the competition.
If Google had been the author of the present M&A mayhem, it could not have written it any better than it plays out now.
Douglas A. McIntyre
Top Gaining Stocks
Top Losing Stocks