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.
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.