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Why Microsoft's $45 bn bid is good for Yahoo

One may call this a hostile bid, but it's good for Yahoo - for the valuation. If Yahoo agrees, it needs to cross shareholder and regulatory roadblocks.

india Updated: Feb 04, 2008 11:32 IST

One may call this a hostile bid, but it's good for Yahoo - for the valuation. If Yahoo agrees, it needs to cross shareholder and regulatory roadblocks. But even so, Microsoft and Yahoo together won't add up to becoming serious competition for market leader Google.

This could be the mother of all tech mergers: a $44.6-billion bid by Microsoft for Yahoo, at 62 percent premium over the market price for Yahoo stocks.

This mega-bid is of course an acknowledgement of Microsoft's failure to monetise its online presence, and of Google's unshakeable dominance. It is ironic that Microsoft of all companies is talking about the evils of monopoly and one-player dominance.

Microsoft has been quoted has saying: "Today, the market is increasingly dominated by one player, who is consolidating its dominance through acquisition...together, Microsoft and Yahoo can offer a credible alternative."

But despite Microsoft's $6 billion acquisition of digital marketing service and technology company aQuantive last year, it still needs Yahoo for its immense reach with consumers. The bid is a good thing for Yahoo, for even if it does not take its offer (and chances are that it would, for it will not get easily a better offer); this bid still places a high valuation on Yahoo. And it sets the ground for other bidders, and interested venture capitalists in the Silicon Valley.

If the bid goes through, Microsoft will have as much of a challenge integrating two vastly different companies with different cultures, as HP did with Compaq. That is of course assuming that (after shareholders of both companies say yes) the US and European Union regulators agree.

So even though the combined entity would represent nearly 9 out of 10 US Internet users' portal visits, and three out of five online ad impressions, in practice it will not be as easy as that to add up the two companies' figures.

Google remains a strong number one. But the new combination could pose better competition to the Google goliath than either Microsoft or Yahoo could or would alone. Someday.

That competition will come into play not before at least a year, or maybe two, while Microsoft-Yahoo run through regulatory and antitrust scrutiny and get their act together. Then they have to figure out how to integrate the two companies, whittle down costs and overlaps, and, most important, figure out if they want to keep two powerful brands or one in multiple categories.

Would India operations of Microsoft or Yahoo be affected? Not for the year ahead. But both have development operations in Bangalore and elsewhere, and finally it would make sense to rationalise development energies to avoid overlap. Given that Microsoft's development activity in India is growing steadily, though, I do not expect layoffs or any centres shutting down. They may simply evolve, or change focus.

So as of now, the deal, if it comes through, is a bonanza for Yahoo shareholders. That includes Yahoo employees with stock options. Google is probably going to benefit from the confusion in the market, just as HP and Compaq's competitors did in the year after that merger happened.

Best of all, for Google, it's going to get more time to work on some of its plans, especially its mobility plans, and the Android operating system, while its two top competitors iron our their problems and plans.

Which suggests that while the bid (whether it comes through or not) is good for Yahoo, it isn't bad for Google either.

(Prasanto K. Roy is chief editor of Dataquest magazine. He can be contacted at pkr@cybermedia.co.in)