Wooing Yahoo

A merged Microsoft and Yahoo would have a major impact in the internet sector, not least on rival Google, writes John Collins.

If successful, Microsoft's unsolicited €44.6 billion bid for struggling internet giant Yahoo, unveiled in what is now being dubbed the "bear-hug" letter of a week ago, would create one of the world's biggest technology groups. But what would Microhoo possibly look like and, more importantly, how would it affect the internet as we know it today?

• CULTURE:While not quite the polar opposites that AOL and Time Warner were when they entered an ill-fated $164 billion (€112 billion) merger in 2000, Microsoft and Yahoo have distinct corporate personalities. Yahoo is firmly of Silicon Valley. Founded by Jerry Yang and Michael Filo in 1994 as a pet project when they studied at Stanford university, it has a laid-back attitude to everything from dress code to meeting etiquette.

The stereotypical Microsoft employee, on the other hand, wears Chinos, a buttoned-down Oxford shirt and uses PowerPoint slides for even the most casual meeting.

The world's largest software company tends to breed aggressive executives in the mode of chief executive Steve Ballmer, who rarely shies away from a fight, while Yahoo advertises its "irreverence" to prospective employees on a job site, saying: "We yodel."

• WEB TRAFFIC:Between all the websites they own, Microhoo would have had 665 million visitors last December, according to monitoring company ComScore. That compares to 588 million for all of Google's web properties. Google would still dominate the lucrative internet search market, with 62.4 per cent of all queries. The combined Microsoft/Yahoo would have just 15.7 per cent of the search market.

• OPENNESS:Google weighed into the fray last week with a blog post on its view of the proposed acquisition. Written by David Drummond, its chief legal officer, the post suggested Microsoft would threaten the underlying principles of the internet - "openness and innovation". He asked: "Could Microsoft now attempt to exert the same sort of inappropriate and illegal influence over the internet that it did with the PC?"

While Microsoft's antitrust travails have been well-documented, the company has shown a more open attitude in recent years. Industry pundits have suggested that Google's argument is a case of the pot calling the kettle black, as it has been accused of being overly secretive and could even be starting to look like Microsoft at the same stage of development.

It has also been widely reported that, last weekend, Google chief executive Eric Schmidt rang Yang to offer his company's support in rebuffing Microsoft's advances.

4 INTEGRATION:The history of the technology industry tells us that the challenges two large companies face putting their businesses together can result in them not becoming the sum of their parts. For Microsoft the biggest challenge would be how to integrate two companies with significant overlap in web properties.

Analysts questioned whether a joint MSN/Yahoo could manoeuvre sufficiently quickly and make the right decisions within the Microsoft bureaucracy to slice and dice overlapping products such as web e-mail and instant messaging. Yahoo Mail and Microsoft's Hotmail have more than 425,000 users worldwide, compared to just more than 90,000 for Google's Gmail.

Microsoft said it expected to be able to drive $1 billion in "synergies" from joining resources in engineering and research and development, reducing capital expenditures and reducing area of overlap.

"Swallowing Yahoo whole into Microsoft is just not going to work," said Toan Tran, analyst at Morningstar.

5 ADVERTISING:Yahoo's recent difficulties have come about because, despite having some of the most profitable sites on the web, profits have been falling. Microsoft's interest in Yahoo seems to be largely centred around winning a larger slice of the $40 billion online advertising market, which is dominated by Google.

If it succeeds, Microsoft's bid could make even more difficult Google's so-far unsuccessful attempt to expand beyond the four-line text advertisements that run alongside internet search results. Microsoft and Yahoo would control more than a quarter of the market for animated ads and colourful display banners at the top of web pages.

Google has relied on search-linked ads for almost all of its $16.5 billion in annual sales and the sixfold increase in its stock since August 2004. With growth slowing in the market for text ads, Google has set its sights on display and multimedia ads.

Google and Microsoft have had regular spats in recent years, but now it seems the gloves are off and Yahoo is caught in the cross fire.

- (Additional reporting: Reuters, Bloomberg)