Off-On-Off Microsoft/Yahoo Talks Engage Industry

By Gavin O’Malley and Les Luchter
Appeared in MediaPost’s Online Daily

INDUSTRY ANALYSTS, MEDIA BUYERS AND search experts were buzzing as rumors swirled of a plan by Microsoft to acquire Yahoo for $50 billion. By the close of business Friday, any talks were already said to be over.

Microsoft most likely leaked news of the talks to gauge Wall Street's reaction, said John Battelle, chief of Federated Media Publishing and author of The Search, an account of the rise of Google.

"They wanted to see how the stock is going to react," said Battelle. "Whether the deal will actually happen? It's 50/50." As of 4 p.m. Eastern time, the share price of the two firms was nearly identical--with Microsoft at $30.56, down 1.32%, and Yahoo at $30.98, up 9.94%.

In any case, with Microsoft's shares falling and Yahoo's shares surging, The Wall Street Journal--one of the first to break the news after The New York Post--suddenly reported that the latest talks were not quite as "current" as originally reported, but that the two companies may still explore ways of cooperating.

David Hallerman, a senior analyst at eMarketer, believed the acquisition would have been a bad move for both parties. "It's a mediocre idea for Microsoft, and a poor idea for Yahoo," he said. "If they're expecting the combined traffic from MSN and Yahoo, they're wrong because there's so much overlap between the two portals."

Indeed, based on figures from Nielsen//NetRatings, any deal would increase Microsoft's leading position in unique Web audience by only 16 million or so. Microsoft in March had 119.6 million unique users and third-ranking Yahoo had 108.5 million, but the unduplicated audience of the two combined totaled 135.5 million. Google, meanwhile, ranked second with 113.5 million unique users.

A combined Microsoft/Yahoo would significantly boost Microsoft's capabilities, but could also present "thorny cultural and technological challenges," said Ri Pierce Grove, an analyst at Datamonitor.

A better idea than the proposed merger, Hallerman said, would be Microsoft spinning off MSN and then combining its portal with Yahoo. "Microsoft buying Yahoo now might be a roundabout way of doing that, I guess. But, I don't think that it's likely," he said.

"It's not in Yahoo's best interest to become part of a company whose main focus isn't ad revenue," Hallerman declared.

But Aaron Goldman, vice president of client strategy and development for Omnicom's Resolution Media, disagreed. "Microsoft and Yahoo are a perfect match for each other," he said, because of Microsoft's historical deficiency in creating scalable digital advertising solutions and Yahoo's corresponding deficiency in creating scalable technology solutions to deliver better advertising. "Bring these two together and you have a company that can excel on both sides of the equation."

Steve Kaufman, senior vice president and media director at Digitas, pointed out some of the potential advantages of a Microsoft/Yahoo marriage to the ad buying community.

For one thing, it would increase ease of buying, even if it didn't lower costs. "I'm still buying the same number of clicks," Kaufman noted, but in one place instead of two. Or, with Google added in, "two places, not three."

The big question, according to David Berkowitz, director of strategic planning at 360i, is: "Can they do more together than they'd be able to do separately? What is it they can accomplish together in banding against the Google search juggernaut that they can't do by trying to grow their market share independently?"

Microsoft lost out to Google's $3.1 billion bid to buy DoubleClick.


Copyright © 2008 Resolution Media, Inc. All rights reserved.