May 1, 2008

Microsoft Owning Yahoo: Only Good for Microsoft

Filed under: Uncategorized — numist @ 10:47 pm
Tags: , ,

For some background, check out this article detailing outcomes and options for Yahoo in the face of the Microsoft’s offer, and the possibilities for Microsoft to go hostile.

From the article:

We are learning that hostile takeovers have arrived in our industry. This is the second major hostile takeover so far — the other was Oracle’s takeover of Peoplesoft — but there will be more.

This is significant because historically hostile takeovers practically never happened in technology. Potential hostile acquirors assumed that hostile takeovers wouldn’t work because the target company’s employees would bail and the target company’s business would collapse.

It turns out that as technology companies become larger and more mature, acquirors are becoming increasingly convinced that neither of these assumptions hold. Perhaps employees of large tech companies aren’t that bonded to current management, and perhaps many of them would actually prefer to work for a larger, more dominant combined company. And maybe as a consequence, the target’s business would do just fine in the wake of a hostile takeover — in fact, maybe it would do better, due to advantages of combined size and scale.

My bet is that hostile takeovers, particularly of larger and more mature companies, are going to become increasingly common in our industry.

I think this is correct, but for the wrong reasons.

Mature companies aren’t necessarily valuable because of their employees and business. In the case of PeopleSoft (the first notable openly hostile takeover in our industry), many of engineers, the entire management, and many of PeopleSoft’s biggest customers left Oracle after the takeover.
In the case of Yahoo, I think the same sort of thing can be expected to happen. But Yahoo’s value to Microsoft isn’t people nor customers. Microsoft could buy Yahoo and fire everyone immediately, because

The value that Yahoo has to Microsoft is email.

Yahoo owns more than half of the world’s webmail. Microsoft is second with about a quarter, and GMail holds about 6%. Both Yahoo and GMail allow you to use POP3 or even IMAP (both open standards that work with any email client) to connect to your webmail account, which is handy. With Microsoft’s webmail, you can use a proprietary protocol that works only with Outlook (or Outlook Express) which work only with… Windows. While there is an Outlook Express (and an Outlook workalike, Entourage) for OS X, they don’t follow the GUI rules and conventions for Macs and are slow and difficult to use. If you’re on Linux, it’s possible, but requires odd hackery (this odd hackery works on OS X as well though).

So Microsoft is second biggest in the webmail world, and they don’t support any open standards.
That’s pretty expected. Historically, they’re either blatantly hostile to all standards, or they force their way through the processes (which really makes the standards process laughable, if you look at the saga of the ISO OOXML approval).

It’s more than webmail, though. Consider ‘real’ mail as well now. Exchange owns 62% of the corporate email environment (which, I’m sad to say, seems low). Exchange favours Entourage/Outlook for its clients, which use a proprietary protocol to make use of all the features Exchange provides.

The takeover of Yahoo by Microsoft gives Redmond a majority share in the world’s email. In effect, it gives them another monopoly.

The difficulty with resisting the hostile takeover is the pervasive myopic financial decisions made by public companies, and the courts arbitrating things like mergers, and the effect this has had on the law. From the article:

Suppose another bidder, like News Corp., enters the fray and offers $32/share, versus the current $29.68 Microsoft bid. Yahoo’s board would of course be free to take the higher bid from News Corp.

On the other hand, suppose Microsoft then raises its bid to $33/share, and then News Corp. holds its bid at $32/share. Could Yahoo’s board still take News Corp.’s bid in preference to Microsoft’s? In a word: no. When a board is presented with multiple offers, it can either take the highest objective offer or it can turn down all the offers. It cannot take an offer lower than the highest objective offer.

This is a phenomenally bad philosophy (actually, this would be enforced by Delaware law in the case of Yahoo). It completely disregards the (highly likely) possibility that Yahoo would improve its services, grow more effectively, and provide more value to its new parent under News Corp. than under Microsoft.

The takeover of Yahoo by Microsoft shouldn’t be stopped simply because it’s hostile and Yahoo doesn’t want to get owned by Redmond. While I believe this should be a good enough reason, it isn’t legally valid, especially since Yahoo’s stock doesn’t have a dual-class share structure that would allow them to repel boarders.

The takeover of Yahoo by Microsoft should be stopped (by the FTC) because it makes Microsoft a bigger monopoly (its status as a monopoly hasn’t changed since the antitrust suits against it were ruled, now it would just monopolize more), and should be stopped (by the shareholders) because it is bad for the company, and bad for their investments (unless their intention is to bail out and never look back).


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