FAQ: Microsoft's proposed takeover of Yahoo

Does a Microsoft-Yahoo deal make sense? Probably. As separate companies, Microsoft and Yahoo duplicate systems and staff. Microsoft CEO Steve Ballmer said a merger could save US$1 billion annually. According to industry observers, the time is right because Yahoo's stock is down, and the company hasn't improved its results even after co-founder Jerry Yang took over as CEO in the middle of last year. Plus, Microsoft's offer, initially 62 per cent over Yahoo's share price, is a very good deal for Yahoo shareholders.

In most areas, a Microsoft-Yahoo merger would be good for both companies. For example, in display ads, adding Microsoft's share would only improve Yahoo's position as the market leader. And because Yahoo is already a powerhouse in mobile technology, adding Microsoft's advertising assets and mobile technology would help the combined company battle Google for the leadership position.

Market research firm IDC says Microsoft, with access to Yahoo's search tools and talent, could buttress its play in the mobile space with respect to search, location-based services and advertising -- three key revenue growth areas of the future. And, IDC said, acquiring Yahoo would allow Microsoft to move enterprise technology to the mass market.

However, not even a combined Microsoft-Yahoo could challenge Google in video advertising, where its YouTube site is the overwhelming leader.

"This acquisition gives [Microsoft] the opportunity to create a 'consumer' subbrand," according to IDC. "By subbranding their SaaS activities, Microsoft can protect their fee-based software license business while aggressively driving growth in the consumer space."

Will the Microsoft-Yahoo deal work or will it be a disaster? For one thing, merging two giant companies is very difficult. Look at US Airways and America West, Vodafone Group and Mannesmann, America Online and Time Warner, Pfizer and Warner-Lambert, and Glaxo Wellcome and SmithKline Beecham.

Imagine trying to merge the cultures of Microsoft and Yahoo as well as the technologies. Silicon Alley Insider founder Henry Blodget gives some reasons why the deal will be a "disaster."

According to Blodget's Web site, it will take a year from the time Yahoo agrees to the deal for the transaction to be finalized. During that time, innovation at both companies will be stifled because developers probably won't want to launch new products when they could be about to lose their jobs. Yahoo/Microsoft employees will be wondering if they'll have jobs, and if they do, they'll be trying to figure out where their loyalties lie. Meanwhile, "Google will be steaming full speed ahead," Blodget said.

In addition, Blodget said the Internet division at Microsoft will always take a "back seat" to the Windows/Office division. While Google wants to use the Internet to build out its business, Microsoft wants to use the Internet to protect its Windows and Office business, he said. "If Microsoft wants a combined Yahoo-MSN to succeed, it has to give it the freedom to destroy Windows and Office," he said. "As long as the entity is under the same corporate roof as Windows and Office, this will never happen."

Finally, Blodget said Microsoft is already doing too many things. Once the deal goes through, Microsoft will be competing with companies like IBM, Oracle, SAP, Salesforce.com and many other software-as-a-service providers in enterprise software. In addition, it will compete with Apple, Sony, Nintendo and others in consumer gadgets, gaming and PC platforms; and Google, Time Warner, Comcast, AT&T, and others in media, advertising and technology.

And because each of these businesses requires different skills, relationships, strategies and expertise, Microsoft will have a hard time winning in all those areas, he said.

"Google is indeed a threat to Microsoft, but so are Oracle, Apple, IBM, RIM and a host of other companies," Blodget said.

How will a combined Microsoft-Yahoo affect users? At some point, you'll probably see some glitches if Microsoft merges MSN and Yahoo, Live Search and Yahoo Search, Hotmail and Yahoo Mail, as well as the two instant messaging services.

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