Merger-mania is in full swing of late, which is rather astonishing given the current credit market problems. Oracle finally managed after months of trying to snare business services provider BEA, and Sun’s purchase of mySQL was both hailed as a master-stroke and derided as a last gasp hope by a fading giant to bolster its database claims. Today the announcement hit the fan that Microsoft had made a $45 billion dollar bid for Yahoo, something that’s made Wall Street happy but that has people in Silicon Valley scratching their heads.
I am not a CEO, nor am I a big investor … and I’m generally not a big fan of mergers and acquisitions (M&As), because, especially when the mergers involve two reasonably large, well-established companies, the results in terms of performance seldom justify the costs involved. This is especially true of tech sector companies, where so many of the assets of the companies are not tied up in physical capital but rather in abstract ideas carried around in smart people’s heads.
The overtures that Microsoft has been making to Yahoo have been obvious for some time. The integration of Yahoo and Microsoft’s IM formats, for instance, hinted that the two were playing footsies under the table, and certainly the announcements that Yahoo would be utilizing Microsoft technology (and Microsoft’s subsequent PR blitz to that effect) at least indicated that the relationship was serious. Thus, the signs have been around for a while, and both the tech and Wall Street press have generally been playing the role of matchmakers. Yet there are more than a few signs that this particular marriage, if consumated, may end up in divorce court nonetheless.
That overlap extends to other services areas, and raises some significant question about which service provider should be responsible for which individual service. Is Microsoft willing to sacrifice Live Spaces (or jettison Yahoo 360 (please!) in order to consolidate user communities (or to use its stake in Facebook to attempt to control all of those spaces)? What about Yahoo’s financial reporting and services compared to those of Microsoft … or MSN vs. YahooNews? What of flickr and all that (somewhat dubious) content?
Microsoft has a reputation for absorbing and re-branding, typically in ways to increase the binding experience with various incarnations of Windows. This has been both a strength and a weakness. As a strategy for building a Microsoft software enabled pipeline its value has been proved over and over again. Its weakness, however, is more subtle. As the world moves increasingly into adopting SOA architectures, the primary value proposition of SOA - its ability to work across heterogeneous envrionments - makes branding far more difficult at the same time it diminishes any piece of the distribution channel that has specific proprietary characteristics.
Yahoo’s value in this regard is as a service provider of note; Yahoo has both a rich SOAP/WSDL infrastructure and also one of the more comprehensive REST based architectures out there. This split emerged for a reason - SOAP/WSDL, while well suited for internal consumption within a department-to-department environment, is entirely too exposed and fragile to work well within an open (consumer facing) web services archtiecture. The question in my mind is whether Microsoft will recognize this evolutionary split or attempt to rein in the REST architectures because of their obvious benefits in establishing decoupled connection points into Yahoo’s interfaces. (The Yahoo Pipes technology being one of the biggest expressions of this).
This comes in particular play for GIS and mapping services. Yahoo’s Open Maps is clearly the superior technology here compared to Microsoft’s Live Maps, which is plagued with problems on browsers outside of Internet Explorer, but whether this is a sufficient cause to sideline Microsoft’s own cartographic team (which released their own Virtual Earth app to compete with GoogleEarth) remains to be seen. It’s likely that there will be hundreds of collisions points between the two organizations, and like all too many M&As may result in its share of pink slips in Redmond as much as in Mountain View. (On the other hand, the recent efforts to integrate instant messaging services may also have served as a test run of larger scale services integration).
There’s a tendency by pundits to want to compare Yahoo with AOL in the first blush coverage, though there are some profound differences at play here. Yahoo has been facing significant pressure along multiple lines primarily because of the drying up advertising revenues (a fate which has also hit Google hard, if its recent 4th quarter results were any indication) but technologically the company has a decent portfolio - flickr, the video services, its travel reservation systems, its news service and so forth.
AOL, on the other hand, is now facing the results of nearly annual purges of key technology people, dozens of disastrous technology investments, a graying audience and the disintegration of its underlying business model. It’s only real “assets” to speak of come from Time Warner content, and internal fiefdom struggles have effectively barred the company from using those connections effectively.Google bought a 5% investment in AOL, in hopes that the cash infusion would be used to help re-right one of their larger search partners, but that investment, like the billions of dollars preceding it, appear to have been frittered away on poor tech and other non-performing investments.
Yahoo is no AOL, in this regard, but the question still remains about whether in fact the merger makes sense from a business (and technology) standpoint or if it is instead a way of buying into an established market (or clearing the marketplace of a potential competitor). Yahoo has faced a few fairly painful quarters, and its own competition in the face of Google has been less than successful, but it is overall still a relatively healthy company. An M&A of this magnitude is going to cause a major degree of friction between the take-no-prisoners mentality of Microsoft vs. the fairly laid back Yahoo corporate culture.
Moreover, it comes at a fairly perilous time - the storm clouds of the economy are definitely getting darker, and its a storm that differs significantly from most recessions in that what is whipping up the winds is not an overhang of supply compared to demand but the inability to free up credit, and while Microsoft has a famously strong cash position, at $45 billion this deal amounts to a fourth of Microsoft’s $283 billion dollar market cap, and it will end up tying up a significant amount of the liquidity of Microsoft for years. Should inflation spiral out of control and the fed be forced to raise interest rates (a la Paul Volcker in the early 1980s), the cost of this deal could skyrocket. Moreover comes the question about whether, in a heated race with Google (even though the search company has faltered itself of late) the time necessary for Microsoft to digest Yahoo will serve only to help Google maneuver handily around the new MS/Yahoo super-company.
Finally, outside of the business sector, there’s a real question here from a technology standards viewpoint. Yahoo has been a significant participant in many of the web standards initiatives and organizations (at least from my own anecdotal evidence) and it is near certain that Microsoft’s acquisition of Yahoo will likely result in Microsoft technology such as Silverlight being used in places where Yahoo had been working with W3C standards (such as the use of XForms and SVG in their mobile applications suite).
This isn’t a done deal yet - Yahoo shareholders still may choose not to accept the offer and to weather the storms on their own, but that’s unlikely to happen. Yahoo’s own position has not been strong for awhile, one of the reasons that the two companies’ orbits have been spiraling together for some time, and, especially if Microsoft’s goal is more focused than simple rebranding of Yahoo assets, they have a fair amount to offer one another, assuming that the cultural differences can be successfully worked out.
It’s more debatable as to how this will benefit anyone else, most especially including web users and technologists. A lot of developers who have integrated Yahoo services into their own apps may be looking very hard at this particular deal and wonder what the future will bring, from a likely increase in the complexity of applications to the possibility that currently freely available streams of data may be relicensed under less amenable terms (or made unavailable at all). It also shifts the dynamic of the constellation of smaller companies that orbit each of these two giants, and will likely end up having a cascading effect of mergers on a number of fairly recent startups built around each service providers’ APIs, which is worth a discussion in its own right some other time.
Either way, the fireworks should be exciting.