Sunday, February 10, 2008
Microsoft Challenges in acquiring Yahoo!
Microsoft's $44.1B bid for Yahoo! has been the hot news for the internet community for past few days. Though there are lot of rosy things in for Microsoft in acquiring Yahoo!, there are lot of challenges involved to make it successful. Here, I try to list few challenges involved.
The price for acquisition is huge and by the Yahoo's reaction it seems like it might fetch around 40$ per share. This would mean P/E of 85. Though this might be still be far lower than the Oracle's acquisition of BEA Systems with P/E of around 270, the size of the acquisition and the given the growth of the Yahoo! in past 2 years make it a costly acquisition. As the history proves that only 20% of M&A's are actually successful, it remains uncertain how much time it would take for Microsoft reap the benefits. The acquisition would add huge amount of goodwill to Microsoft's balance sheet to already huge 10.3B$ of goodwill present. Also, Microsoft needs to borrow huge debt for the first time, leading to increased interest payments. This acquisition could prevent Microsoft from making other big acquisitions for some time giving an edge to Google to acquire relevant startups avoiding huge competitive bidding.
The other challenge lies in the anti-trust issues. It could take more than a year to complete the acquisition as Google would try hard to push the approval from regulatory to buy time to come up with adequate strategy to fight the combined forces. Also, this could lead to spinning of some of the business of both Yahoo! and Microsoft though not the core search and advertising business.
Coming to the positive side of the things, the combined forces of Yahoo and Microsoft would be able to attract advertisers. As per the current situation there are rarely any advertisers who advertise only with Microsoft and Yahoo!. All of them choose them after advertising with Google. With combined forces, this may change and they may be able to attract big advertisers like AOL for exclusive advertisement which make huge chunk of Google's revenue today.
Perhaps the biggest challenge lies in the integration of technology. Yahoo! and Microsoft use different technologies. Microsoft has been traditionally inclined to using its own softwares be it operating system, database (MSSQL) or .NET, ASP platforms. In contrast Yahoo! uses lot of open source softwares and non Microsoft's softwares like UNIX, JSP etc.. Integrating them would involve huge effort and pain to the engineers of both the companies which might not be a job they would like. Adding to it is the difference in culture of the companies where fun loving humor culture of Yahoo! might not be there at Microsoft. This might lead to many employees of Yahoo! and even Microsoft quitting to join startups or perhaps Google. To avoid the situation Microsoft needs to compensate them which might add further to the burden of Yahoo!.
Overall, it might take at least three years or perhaps more to get some benefits of acquisition and thereafter some more time to make the search engine as effective as Google. This is sufficient time for Google to make it more strong and taking it into new standards. Also, the question remains whether Microsoft would Kill Yahoo! or would keep it both of which have their own pros and cons.
In short, I would suggest Yahoo! share holders to sell the stock to benefit from upturn, and avoid Microsoft stock and Google shareholders to hold on to it. Also, it might be good opportunity to grab Google stock.
The price for acquisition is huge and by the Yahoo's reaction it seems like it might fetch around 40$ per share. This would mean P/E of 85. Though this might be still be far lower than the Oracle's acquisition of BEA Systems with P/E of around 270, the size of the acquisition and the given the growth of the Yahoo! in past 2 years make it a costly acquisition. As the history proves that only 20% of M&A's are actually successful, it remains uncertain how much time it would take for Microsoft reap the benefits. The acquisition would add huge amount of goodwill to Microsoft's balance sheet to already huge 10.3B$ of goodwill present. Also, Microsoft needs to borrow huge debt for the first time, leading to increased interest payments. This acquisition could prevent Microsoft from making other big acquisitions for some time giving an edge to Google to acquire relevant startups avoiding huge competitive bidding.
The other challenge lies in the anti-trust issues. It could take more than a year to complete the acquisition as Google would try hard to push the approval from regulatory to buy time to come up with adequate strategy to fight the combined forces. Also, this could lead to spinning of some of the business of both Yahoo! and Microsoft though not the core search and advertising business.
Coming to the positive side of the things, the combined forces of Yahoo and Microsoft would be able to attract advertisers. As per the current situation there are rarely any advertisers who advertise only with Microsoft and Yahoo!. All of them choose them after advertising with Google. With combined forces, this may change and they may be able to attract big advertisers like AOL for exclusive advertisement which make huge chunk of Google's revenue today.
Perhaps the biggest challenge lies in the integration of technology. Yahoo! and Microsoft use different technologies. Microsoft has been traditionally inclined to using its own softwares be it operating system, database (MSSQL) or .NET, ASP platforms. In contrast Yahoo! uses lot of open source softwares and non Microsoft's softwares like UNIX, JSP etc.. Integrating them would involve huge effort and pain to the engineers of both the companies which might not be a job they would like. Adding to it is the difference in culture of the companies where fun loving humor culture of Yahoo! might not be there at Microsoft. This might lead to many employees of Yahoo! and even Microsoft quitting to join startups or perhaps Google. To avoid the situation Microsoft needs to compensate them which might add further to the burden of Yahoo!.
Overall, it might take at least three years or perhaps more to get some benefits of acquisition and thereafter some more time to make the search engine as effective as Google. This is sufficient time for Google to make it more strong and taking it into new standards. Also, the question remains whether Microsoft would Kill Yahoo! or would keep it both of which have their own pros and cons.
In short, I would suggest Yahoo! share holders to sell the stock to benefit from upturn, and avoid Microsoft stock and Google shareholders to hold on to it. Also, it might be good opportunity to grab Google stock.
Labels: Microsoft - Yahoo - Google
