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Microsoft Yahoo Meetings Signal Start of Intelligent Acquisition or Merger

Microsoft and Yahoo may be in talks again on some sort of advertising partnership, or babysteps to an inevitable acquisition of Yahoo by Microsoft, as the rumor mill focuses on the two companies as a prelude to this week’s earnings reports.

According to an exclusive from Kara Swisher of All Things D, Microsoft CEO Steve Ballmer and new Yahoo CEO Carol Bartz had a face to face meeting to discuss the two companies working together on search and also advertising partnerships. The face to face meetup was the pinnacle of several recent meetings between the two companies recently, which were wide ranging according to Swisher.

The meetings however, were not specifically about another Microsoft bid to acquire Yahoo, but more so the option of the two companies working together. Ironic as it may seem, when Microsoft made its attempt to acquire Yahoo last year, Yahoo ended up meeting with Google and embarked on the limited testing of a Yahoo-Google advertising partnership, which ultimately failed in light of anti-trust warnings (the deal would have given Google AdWords a massive monopoly on sponsored search advertising).

What do I think about these meetings? I believe that all good partnerships and relationships begin with babysteps and collaboration. And very unlike one year ago where Ballmer’s Microsoft took an aggressive approach at acquiring Yahoo in order to compete with Google, now it seems that Ballmer has settled down a bit and is taking a more constructive approach to doing business with Yahoo, the enemy of his enemy in Palo Alto.

Microsoft’s Year Long Courting of Yahoo

It’s been over a year since Microsoft first sent ripples in the search and Internet market by proposing a buyout of Yahoo last February for a whooping sum of $44.6 billion.

At the time, Yahoo was on a downward spiral, with new CEO Jerry Yang at the helm and following a couple of years of wild growth, confusion, overspending and indecision. Microsoft proposed a letter to Yahoo’s Board, referencing Google’s dominance of the online advertising market, deemed it necessary to combine forces with Yahoo.

While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence. 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 for consumers, advertisers, and publishers.

One week afterwards, Yahoo officially rejected the Microsoft bid, with the Yahoo Board believing that the $31 per share bid undervalued Yahoo as one of the 3 major search players.

Ultimately in May 2008, Microsoft cancelled their acquisition bid, but not their ultimate desire to work with Yahoo or one day, try acquisition again :

“We continue to believe that our proposed acquisition made sense for Microsoft, Yahoo! and the market as a whole. Our goal in pursuing a combination with Yahoo! was to provide greater choice and innovation in the marketplace and create real value for our respective stockholders and employees,” said Steve Ballmer, chief executive officer of Microsoft.

“Despite our best efforts, including raising our bid by roughly $5 billion, Yahoo! has not moved toward accepting our offer. After careful consideration, we believe the economics demanded by Yahoo! do not make sense for us, and it is in the best interests of Microsoft stockholders, employees and other stakeholders to withdraw our proposal.”

Ballmer did later tell the Washington Post that Microsoft would be aggressively seeking collaboration with Yahoo:

We made an offer; there clearly was a bid-ask difference. We offered less than they wanted. We did move on. We’ve had some discussions subsequent to that. We have not re-engaged in the discussions about the acquisition of the whole company. We are discussing other forms of strategic cooperation. That’s 100 percent accurate.

Microsoft Still Needs Yahoo to Compete, and Yahoo’s Almost Ready

The fact is, Microsoft needs Yahoo as much as Yahoo needs Microsoft. In order to effectively battle Google in the field of search and beyond, for as stagnant as Yahoo may seem, Microsoft has been much more unfocused and confused in its search direction.

If anything, the acquisition of the properties of Yahoo Search, Yahoo Search Marketing, Flickr, Delicious and even Yahoo Sports, Finance or News will fortify the holes in Microsoft, which has butchered its own search engine with poor branding and search results which seem to have worsened when all of the other search engines are updating and improving their algorithms.

When Microsoft approached Yahoo on an acquisition bid last February, the company was already down and vulnerable. Jerry Yang was seen by many as being the Howard Hughes of search, with Yahoo being his Spruce Goose. Not only would Yang not let go of the company, but he made it a point that Yahoo was his baby, and he was to run things his way.

On the other hand, perhaps that mentality is exactly what Yahoo needed as a transitional bridge from a Hollywood Diva corporation into a streamlined and efficient Google-esque valley tech firm again, reawakening that start-up mentality with a slap of reality. Some of the offering which Yang first took over are stark reminded of what the company could have been, and how warring factions within the company held them back from corporate evolution.

Yahoo Missed the Social Media Boat, Sinking Ever Since

Yang immediately cut off some of the “Hollywood Diva” Yahoo regime’s projects including Yahoo Photos and Yahoo 360, while also laying off 1,000 workers before the end of 2007, which could have been seen as a forewarning of things to come in the economy. Why do so? It makes no sense to allow an inefficient and big-spending company to be acquired. One of the basic rules of preparing a company to be sold is showing as much profit as possible. That fact was, Yahoo could have been run with about half the manpower and add-ons.

The cuts to programs like Yahoo 360 and Yahoo Mash were also stark reminded on what the company could have been as Yahoo, a 1990’s style social network in its own right, never made that step to “Web 2.0” ironic for a company which acquired Flickr and Delicious; the martyrs of the Web 2.0 movement.

While the Yahoo Network group and the Yahoo Search people and the Yahoo Entertainment groups were trying to figure out the best way to connect their users in a social manner, MySpace launched and caught on fire, and then Facebook. Yahoo, with its hundreds of millions of users who use the network as a communications tool in Yahoo Mail and Yahoo Messenger, if done correctly, could have connected these users in a social manner utilizing the MyYahoo start page and could have ruled the social media world. It would have been easy. That is, easy and logical to visualize and not implement, as a lot of Yahoo did not want to change, despite the obvious direction Weiner’s Yahoo Network should have gone down.

The end result? Yahoo kept focusing on its past and showboating Yahoo Answers as the answer to their problems, and Facebook now has over 200 million users and is slowly becoming the new startpage of the Internet. Hundreds of millions of users and the “start page” of the Internet … sound familiar? This is what Yahoo used to pride itself as.

New Yahoo CEO Carol Bartz

What do you do with a company which keeps living in the past? You bring in new blood, and many agree that Yahoo CEO Carol Bartz is the new blood which the company needs to either succeed, or prepare itself to team with Microsoft to do battle with Google. The attempted Microsoft acquisition of Yahoo last year left Yang looking weak and embarrassed, trying to keep together a faction of Yahoo investors who wanted to become part of the Microsoft monster. The truth is, Yang fought hard, even though it is difficult to pronounce him a victor, and stepped down at the right time to let Bartz take over the helm.

Bartz has a lot more leverage now than Yang had one year ago. Yahoo Search is steady, with a 16% share of the market and some growth over the past year (this may not last with its recent Yahoo Toolbar distribution loses with Acer and HP (Acer went with Google and HP with Microsoft). Microsoft Search however has virtually experienced ZERO growth over the past year, with only 0.3% growth and a 10.3% hold of the search market, zero growth is not a good thing.

And although Yahoo missed the boat with establishing itself as a social network, which would have probably been its saving grace, the company still has Delicious bookmarking and tag oriented external meta data, which is invaluable to search. If Yahoo was late to the table with social networks, Google was late to the table with social bookmarking.

Yahoo, and Microsoft, can together establish a much more relevant search algorithm by utilizing the data which Delicious delivers. A Microsoft Yahoo merger would open their Micro-Hoo search engine, to the wealth of information available to only them via Delicious, helping the search engine to :

  • Indexing Sites Faster : Humans bookmark sites launched by their friends or colleagues before a search engine bot can find them.
  • Deeper Indexing : Many pages bookmarked are deep into sites and sometimes not as easily linked to by others, found via bad or nonexistent site navigation or linked to from external pages.
  • Defining Quality : If someone takes the time to bookmark a site, it usually has some quality to it.
  • Measuring Quality : Essentially if more users bookmark a page, the more quality and relevance that site has. A site with multiple bookmarks across multiple bookmarking services by multiple users is much more of an authority than a site with only several bookmarks by the same user.
  • External Meta Data : Users who bookmark sites tag them with keywords and descriptions which add an honest and unbiased definition which is created by the public and not the owner of the site.
  • Co Citation : Social bookmarking sites tend to categorize sites and pages based upon the tags used by humans to describe the site; therefore search algortihms can classify these sites with their peers.

Yahoo bought Delicious for somewhere around $30 million to $100 million back in 2005 (the numbers online are all over the place), but Delicious could be worth a lot more to Yahoo in Microsoft merger and/or acquisition negotiations.

If Yahoo AND Microsoft Search were to merge, their combined share would be roughly 26% of the search market, and growth would be expected as a Google alternative with inherent browser and communications integration with Yahoo Mail, Hotmail, Yahoo Messenger, Office and other combined tools.

Furthermore, unlike Google, Yahoo is the friend of the newspaper industry, with over 793 newspapers as partners in its Yahoo Newspaper Consortium, which is an advertising and content partnership between Yahoo and news publishers. The Newspaper consortium works like this; Yahoo sends more traffic to newspaper websites via Yahoo News and the Yahoo Homepage, while the newspaper sites serve Yahoo powered advertising to Yahoo referrals and also use Yahoo Hotjobs to power their online classifieds. Yahoo has proven itself the friend and possible savior of the newspaper industry, an industry which is currently being forced to concentrate moreso online than in papers themselves.

Partnership or Merger?

With Yahoo Search, Yahoo News, the Newspaper Consortium, Yahoo Sports, Yahoo Advertising and other Yahoo offerings under her belt, plus a more streamlined company, Bartz has much more room to leverage a smart partnership with Microsoft, which is what we’ll probably see as being a result of these meetings the Internet has been so livid about.

All eyes however will be on Yahoo’s earnings reports tomorrow, because if Yahoo can follow last week’s stock market surge and show itself as turning a profit, growing or on the road to being reborn, the company will have much more leverage for a merger, and not an all out acquisition by Microsoft. Then again, if Microsoft were to acquire Yahoo this month for billions more than the $44.6 billion that they proposed last year, Yahoo will walk away from the deal the hero, and by combining forces, Yahoo and Microsoft will be able to compete in the open market against Google, which in itself is good for the global economy.

Category SEO
SEJ STAFF Loren Baker Founder at Foundation Digital

Loren Baker is the Founder of SEJ, an Advisor at Alpha Brand Media and runs Foundation Digital, a digital marketing ...

Microsoft Yahoo Meetings Signal Start of Intelligent Acquisition or Merger

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