I’ve been thinking about the proposed Yahoo-Microsoft merger since the news broke on Friday. As a closeted economist and enterprise apologist, the offer’s value really jumped off the page. Microsoft is offering $44.5 billion in cash and stock for a business that generated just under $7 billion in revenue in its fiscal 2007. Microsoft’s Office business unit generated more than $16 billion on its own (check the side panel graphic).
Yeah, I know it’s a 60-something percent premium on last week’s stock price, but I think we can agree that stock price doesn’t always accurately reflect the value of a business. Oracle has spent north of $40 billion on about 40 companies in the last two years. Three of the largest, PeopleSoft, Siebel and Hyperion, cost around $20 billion total.
I dug through the SEC filings for these three, and their collected revenue, as reported in the last 10-Q filing before the acquisition closed, is about $1.2 billion. This gives a loose idea of the value each had right before Oracle closed the deal. You could argue that the $20 billion Oracle paid for these three represents a much better investment. I say “could” because it’s very difficult to compare the values of these companies to each other, let alone to Yahoo. You have to adjust for inflation, quarterly earnings fluctuation, etc.
But, because this is a blog, I will throw out an arbitrary comparison for my own amusement. Let’s call it the last quarter measure or LQM for short.
- Yahoo just reported earnings of $1.7 billion for Q4 of 2007.
- Microsoft offered $44.5 billion.
- This makes the LQM of that deal 26.17.
- PeopleSiebelHyperionSoft reported summarized earnings of $1.2 billion for their last quarters.
- Oracle paid about $20 billion for them.
- This make the LQM of those deals 16.67.
So, using my LQM theory, Microsoft is paying a boatload for very little in tangible return. All this is my attempt understand why this deal even gets offered. This makes no sense at all to me. It’s madness. Won’t somebody please think of the children?
So, let’s brainstorm reasons why.
Maybe it’s email. Yahoo has 250 million email users, and their properties still rank at the top of the top content sites. They have some Web 2.0 credibility with Flickr (side note, apparently a vocal minority of Flickr users is seriously upset), Delicious and Upcoming. They have an advertising platform (Panama) in the works. They still have search, right? I haven’t checked for a while. No one denies that Yahoo has users and content.
Microsoft has hundreds of millions of email users, an advertising network (aQuantive) and search, so I hear. Suffice to say there’s a significant amount of overlap between in these and other areas including instant messaging, mashup tools, etc. So, users, check. Content, check.
What are they buying? Where’s the social network, Mashable asks? Good question, I thought that was the jewel in the Web 2.0 crown.
This is where it gets interesting for me. All this ludicrous valuation reminds me of . . . Facebook.
Wait, didn’t Yahoo try to buy them not once, but twice in the past? Didn’t Microsoft just invest $240 million in Facebook in October for a measly 1.6% of the company?
This is the one dot that connects Yahoo to Microsoft for me.
- Microsoft is banking on Facebook as its social network play. Say all you want about how Facebook will remain staunchly independent and won’t let Ballmer dictate terms. That’s noise. Remember that in addition to the investment, Facebook’s biggest (by a lot) revenue stream comes from an ad contract with Microsoft. Microsoft has a seat at the social network table because of Facebook.
- Buying Yahoo helps close the distance with Google. Yeah, there’s a huge amount of overlap, but Yahoo is strategic and will bring Microsoft closer to Google in ads and search. And, it will push Google further away in email. Tim O’Reilly agrees, so it must be true.
- There’s been a lot of talk about Microsoft and Yahoo independently making headway to socialize email, i.e. leverage their enormous freemail (Live, Hotmail, Yahoo Mail) and enterprise (Outlook, Exchange, Zimbra) email user bases to deploy New Web features. Remember, Google is doing the same thing by connecting its products to email, e.g. Reader and GMail.
- Finally, Microsoft won’t give up on search yet. The purchase of FAST was a shot in the war for enterprise search, which Google has a foothold in with the Mini and GSA. Oddly, Yahoo has an enterprise search product through a partnership with IBM, too. On the public search side, I’m sure FAST has some useful IP, and combined with Yahoo’s leftovers and their Live Search unit, Microsoft could still make up ground in Interwebs search.
This puts it all in focus. Apparently, Microsoft’s online division is the only major division that loses money, so Microsoft is piecing together a New Web strategy (Yahoo, Facebook), moving in enterprise search (FAST, Yahoo), gaining in public search (Yahoo), and moving in ads (Yahoo). All these are fronts in the war with Google.
Still, it seems like a lot of money. I guess Microsoft is serious. On that note, from the ghosts of Microsoft wars past, Netscape got a reprieve from the governor and will live on until March 1, 2008 apparently.
What do you think? Am I reading too much into this? Can Microsoft take on Google or vice versa? Sound off in comments.
Update: An unsubstantiated, but tantalizing rumor, is circulating that Google (or MySpace) might buy Bebo in response to the Yahoo-Microsoft wedding in progress. Sounds false, but if it fits either one, it fits Google. Remember when News Corp bought MySpace for $580 million? Those were the days.
Don’t forget about Silverlight and Microsoft’s now ability to force or strenuously recommend that it needs to be used to get full use of Yahoo and all Yahoo’s properties.
Don’t forget about Silverlight and Microsoft’s now ability to force or strenuously recommend that it needs to be used to get full use of Yahoo and all Yahoo’s properties.
Interesting, do you think it would go that way? I see Microsoft keeping big Yahoo properties pretty much as is for a while.
Interesting, do you think it would go that way? I see Microsoft keeping big Yahoo properties pretty much as is for a while.
Yeah I don’t see anything changing quickly, but change it will.
I don’t see Microsoft not using a semi captive audience to push some technology on people that locks people more closely into MS products.
It’s almost like they have done it before…….almost.
Carl
Yeah I don’t see anything changing quickly, but change it will.
I don’t see Microsoft not using a semi captive audience to push some technology on people that locks people more closely into MS products.
It’s almost like they have done it before…….almost.
Carl
Good point, I have completely written off Silverlight, but if Y! sites required it, I would comply like the sheep that I am.
You don’t think Microhoo would be good for competition with Google? I feel like they could jump over Google with the right product set. They have a lot of entrenched users who won’t accept new-fangled Google stuff.
I guess the assumption is that Google needs competition. I have trouble seeing Microsoft as evil anymore (more funny ha-ha), so you may be right.
Good point, I have completely written off Silverlight, but if Y! sites required it, I would comply like the sheep that I am.
You don’t think Microhoo would be good for competition with Google? I feel like they could jump over Google with the right product set. They have a lot of entrenched users who won’t accept new-fangled Google stuff.
I guess the assumption is that Google needs competition. I have trouble seeing Microsoft as evil anymore (more funny ha-ha), so you may be right.
Well I think there are more dogs in that fight, than just MS+Yahoo and Google, over Web N.N there is also a standards and framework fight.
Adobe Air vs MS Silverlight vs Open Standards all trying to lock us into their view of technology.
The YUI library is one of the better AJAX-RIA libraries out there and how much support for that you think that will be getting under MS.
Flikr uses all sorts of Flash which is easily ported to AIR that will be going to Silverlight, which will suck for us Linux and Mac folks but like MS will care about that as much as Yahoo did.
There is also IE vs Firefox vs Safari, how fast do you think the Yahoo properties will start sucking on those other browsers. Development and QA for them will be secondary, at least that’s what I would do, when I know I’m getting an MS paycheck.
Sure competition is good but when is the last time you saw MS competing fairly. I’m already past the whole everything Google does is good and the best because it’s not, Google is the next MS and MS is still MS.
I pick and choose which services I use on both anyway so as soon as I see one of the services not working the way I want I will switch to the other or find a third option. But I don’t think you or me is the target audience for this.
It’s the people like my mom who have been using Yahoo since i set up her email there, she will ,most likely, never switch and will jump through whatever hoops they make her so she can still use the services she needs.
One way or another it will be interesting.
I’d like my 23cents change back now 😉
Well I think there are more dogs in that fight, than just MS+Yahoo and Google, over Web N.N there is also a standards and framework fight.
Adobe Air vs MS Silverlight vs Open Standards all trying to lock us into their view of technology.
The YUI library is one of the better AJAX-RIA libraries out there and how much support for that you think that will be getting under MS.
Flikr uses all sorts of Flash which is easily ported to AIR that will be going to Silverlight, which will suck for us Linux and Mac folks but like MS will care about that as much as Yahoo did.
There is also IE vs Firefox vs Safari, how fast do you think the Yahoo properties will start sucking on those other browsers. Development and QA for them will be secondary, at least that’s what I would do, when I know I’m getting an MS paycheck.
Sure competition is good but when is the last time you saw MS competing fairly. I’m already past the whole everything Google does is good and the best because it’s not, Google is the next MS and MS is still MS.
I pick and choose which services I use on both anyway so as soon as I see one of the services not working the way I want I will switch to the other or find a third option. But I don’t think you or me is the target audience for this.
It’s the people like my mom who have been using Yahoo since i set up her email there, she will ,most likely, never switch and will jump through whatever hoops they make her so she can still use the services she needs.
One way or another it will be interesting.
I’d like my 23cents change back now 😉
Your last point is a good one, which is what I meant by “entrenched users”.
MS isn’t what it was when it took on Netscape, neither is Yahoo. Maybe it’s naive, but I don’t think this goes the same way either. There are too many other choices which will prevent the same type of dominance.
I like AIR and Flash, so maybe we should breath some life back into the Apple+Adobe rumor.
Your last point is a good one, which is what I meant by “entrenched users”.
MS isn’t what it was when it took on Netscape, neither is Yahoo. Maybe it’s naive, but I don’t think this goes the same way either. There are too many other choices which will prevent the same type of dominance.
I like AIR and Flash, so maybe we should breath some life back into the Apple+Adobe rumor.
I forgot the overlap in widgets too, Vista Gadgets vs. Yahoo (Konfabulator) Widgets. Meh, that’s so 2007.
I forgot the overlap in widgets too, Vista Gadgets vs. Yahoo (Konfabulator) Widgets. Meh, that’s so 2007.
See I’m not the only one http://blog.wired.com/monkeybites/2008/02/what-would-micr.html
See I’m not the only one http://blog.wired.com/monkeybites/2008/02/what-would-micr.html
I know, I’ve read the Microhate, but I just don’t see them as the evil company there were back in the late ’90s. Probably naive of me.
I know, I’ve read the Microhate, but I just don’t see them as the evil company there were back in the late ’90s. Probably naive of me.
OK so what about Yahoo not taking the money. If you believe that Microsoft might be overpaying, how would you defend Yahoo decision not to sell?
OK so what about Yahoo not taking the money. If you believe that Microsoft might be overpaying, how would you defend Yahoo decision not to sell?
@Marius: I’m out of the loop, being on vacation and all for a week, so I’ve no idea what’s current on this drama. My take is that Ballmer and MSFT will up the ante to get the deal done. Yahoo’s shareholders can’t be that strong on the company’s future as a separate entity. Look at how much they’ve lost in a year.
@Marius: I’m out of the loop, being on vacation and all for a week, so I’ve no idea what’s current on this drama. My take is that Ballmer and MSFT will up the ante to get the deal done. Yahoo’s shareholders can’t be that strong on the company’s future as a separate entity. Look at how much they’ve lost in a year.
Telling you Silverlight is a big reason for this
http://www.regdeveloper.co.uk/2008/03/05/ozzie_microsoft_services/
Telling you Silverlight is a big reason for this
http://www.regdeveloper.co.uk/2008/03/05/ozzie_microsoft_services/
@Carl: Interesting, esp in light of Jobs’ rejection of Flash for the iPhone. Silverlight anyone? Weird b/c Silverlight slipped out of my consciousness after Popfly alpha launched.
@Carl: Interesting, esp in light of Jobs’ rejection of Flash for the iPhone. Silverlight anyone? Weird b/c Silverlight slipped out of my consciousness after Popfly alpha launched.