Mr Cool
Sunday, May 11, 2008, 11:01 PM
Ok while we admire his handsome features, lets start to ponder over some economics!
What Would a Combined Microsoft-Yahoo Look Like?
Erick Schonfeld
Microsoft’s $31 a share offer for Yahoo is made possible by Yahoo’s slumping shares (Yahoo’s stock was trading at about $31 a year ago). While Yahoo has rejected Microsoft’s entreaties in the past, with Terry Semel stepping down as chairman of the board yesterday, things might be different this time. I ran some quick, back-of-the-envelope numbers to see what a combined Microsoft-Yahoo would look like financially, and how it would compare to Google. 
* Microsoft figures are trailing four quarters and headcount is from June. Search figures from comScore.
Those headcount numbers and operating expenses could be cut significantly. Microsoft says it can shave at least $1 billion from operating expenses in a merged company.
The real impact to Microsoft, though, is not visible in these numbers because Yahoo represents a new growth opportunity for Microsoft in advertising revenues and online services. During the last four quarters, Microsoft’s revenues for its online services (MSN, Windows Live, aQuantive, etc.) were $2.8 billion and it lost $949 million. So just combining Yahoo with that business, you get revenues of $9.8 billion, but Microsoft would still be showing a net loss for that business of $289 million.
But this is an advertising play for Microsoft. It wants to combine the scale of its recently acquired advertising networks with that of Yahoo’s, along with Yahoo’s vast consumer reach (which is appealing to advertisers, who see all those eyeballs as valuable inventory).
On the conference call explaining the deal, Microsoft CEO Steve Ballmer general counsel Brad Smith points out with glee that, while other companies may make competing bids for Yahoo, one company that clearly can’t is Google. Citing a 75 percent market share in the paid-search advertising market worldwide, Ballmer asserts, “Google is prevented by antitrust laws from buying Yahoo.” (He should know, he does have some experience with antitrust laws). At the end of the call, CEO Steve Ballmer said that another driver behind the acquisition is to move Microsoft towards a more Web-based software-as-services company:
The Windows user wants to be live. There will be a Windows Live. There will be an Office Live.
Yahoo clearly has some strengths in this area, with its continued evolution of Yahoo Mail, acquisition of Zimbra, and other initiatives.
Update: Here are some numbers from Hitwise on the combined traffic reach of Yahoo and MSN properties. Together, they have a 15.6 percent market share of Internet traffic in the U.S. , compared to 7.7 percent for Google properties. But Google still has double the market share in search of both Yahoo and Microsoft combined.
But if we consider only search volume, the picture is very different. For the four weeks in January 2008, Google accounted for 65.98% of all executed searches in the U.S., while combining executed searches for Yahoo! Search and MSN Search would amount to 27.84% of executed searches for the same time period.
While the deal would have limited impact on Google's continued dominance of search, the combined content of Yahoo! and MSN properties yields an impressive list of top sites by industry category. In the table below, we've listed where Google, Yahoo! and MSN properties appear within the top five positions by industry category for U.S. Internet visits for the week ending January 26, 2008.
Source: http://www.techcrunch.com/2008/02/01/what-would-a-combined-microsoft-yahoo-look-like/------------------------------------------
EvaluationIn the recent years, Google Inc. has experienced phenomenal growth in the Information Technologies sector as it edged out major market players like Yahoo Inc. and Microsoft Corporations to dominate the search engine industry, holding a significant market share of 54.9%. This has resulted in the creation of a monopoly and it is posing serious competition to her rival firms.
Hence, in order for Microsoft to remain competitive, it has decided to acquire Yahoo Inc. to increase its market share translating to market dominance and power in order to increase its revenue from paid advertising. The decision comes at a crucial time as Yahoo Inc. is currently facing slumping share prices, rendering a lower market value for its company hence making it more cost-efficient for potential acquisition of Yahoo Inc. by other firms. Furthermore, due to anti-trust laws that restrict Google from acquiring Yahoo, as it could result in a complete monopolizing of the search engine market and seriously threaten the survival of other firms in the industry, Microsoft is now in the best position to acquire Yahoo Inc.
Furthermore, Microsoft says it can “shave at least $1 billion from operating expenses in a merged company”. This probably implies that internal economies of scale can be reaped through the process of this horizontal integration. Through merger, administrative costs can be reduced and managerial roles can be maximized to enhance productivity, translating into lower variable costs for the company.
Also, “Yahoo represents a new growth opportunity for Microsoft in advertising revenues and online services”. This can be accounted to a larger market share which would render its advertising services more price-inelastic since companies would want to reach out to a larger market and not cut costs but advertising through a company whose services do not reach out to a large market even though they may charge lower prices. Hence, Microsoft will then be able to increase prices charged for its paid advertising services, thereby increasing its total revenue. Furthermore, marketing economies can also be reaped as advertising cost can be reduced when the advertising is done at a larger scale.
Lastly, “another driver behind the acquisition is to move Microsoft towards a more Web-based software-as-services company”. Therefore, since “Yahoo clearly has some strengths in this area”, a merger will likely result in the reaping of technical economies by Microsoft, whereby newer technologies can be researched and specialization can occur, thereby raising productivity and lowering unit costs.
Yet, even though the combined market shares of Microsoft and Yahoo Inc may not surpass that of Google in the search engine market, the merger will undoubtedly render Microsoft the biggest player in other services like games, sports and music services (as seen from the table above). Hence, it is indeed a wise move for Microsoft to acquire Yahoo Inc.
Therefore, with the potential market changes at stake, the possible merger between Yahoo Inc. and Microsoft Corporations will definitely be a hot topic for contention amongst various major IT firms as it could result in the birth of a giant player in the IT industry.
ZHI JIE
