Page last updated at 13:45 GMT, Friday, 1 February 2008

Microsoft and Yahoo's shotgun marriage

By Tim Weber
Business editor, BBC News website

Yahoo founder Jerry Yan and Microsoft founder Bill Gates
Jerry Yang's and Bill Gates' legacies are at stake

Is this Bill Gates' last big throw?

Microsoft's proposal to buy internet veteran Yahoo for a whopping $44.6bn (22.4bn) certainly grabs the attention.

But does it make business sense?

In a way this won't be the Microsoft founder's problem. This summer Mr Gates will leave the company to work full-time on fighting global poverty and diseases like Aids, Malaria and TB.

But the Microsoft managers who have to make it work will be asked whether this is a case of one failing giant trying to prop up another.

The Google factor

Yahoo has been on the ropes for a long time.

Once the top dog of the internet, the company has been haemorrhaging users and money. With advertising income not anywhere near where it should be, Yahoo's share price is stuck in the doldrums.

If Yahoo agrees to the deal with Microsoft, it will be a shotgun marriage, but it will be Google holding the shotgun.

Last June Yahoo's board chucked out chief executive Terry Semel and brought back co-founder Jerry Yang to recapture the firm's dominance - to little avail.

One word explains all of Yahoo's troubles: Google. While Yahoo invested in content to lure its audience, the search engine rival simply focused on delivering what users really wanted: good search results.

Fighting over the mobile web

Microsoft has watched Yahoo's struggle closely, and seen the writing on the wall.

As Google has grown into a billion dollar business, it has increasingly strayed into Microsoft's territory, competing not just for advertising revenue but rivalling core Microsoft products like email and word processing.

That alone would not be enough to persuade Microsoft to make this unsolicited offer.

Microsoft was late to the internet and has always been playing catch up.
Darren Waters, technology editor, BBC News website

Don't forget, despite its many challenges Microsoft is still in rude health. It has one of the world's largest research and development budgets, and key software products like Windows and Office are still licences to print money.

But Microsoft also knows that its stronghold, the PC business, is getting less and less important.

The future of today's IT industry is the rapidly growing mobile internet space, and Google has made no secret that it is prepared to spend a lot of money to conquer this market.

Ultimately, Google and Microsoft pursue the same market, although they approach it from two different directions.

Google wants to enable its customers to organise and find the whole of human knowledge, and is providing the tools to do so.

Microsoft is a provider of tools that just happen to help users to process and use information.

Now both firms are meeting in the middle and fight for market space.

Shotgun marriage

If Yahoo agrees to the deal with Microsoft, it will be a shotgun marriage, but it will be Google holding the shotgun.

If Yahoo's management says "yes, I do", it will be an admission that its attempts to turn around the company have failed.

Yahoo shareholders, in turn, will not be able to believe their luck. Microsoft was probably the only company with pockets deep enough to bail them out.

For Microsoft, however, this is the deal that could break it.

Making the offer is an admission that Microsoft's management has been scared by the success of Google.

The bid is also an acknowledgement that its numerous attempts to become a dominant internet content provider have failed.

But to make it pay, Microsoft will have to demonstrate that the combined company can offer a superior business model.

The big bet

Microsoft is promising that together with Yahoo it can offer "a competitive choice" that offers "more value... to advertisers, publishers and consumers".

That holds true only if the combined Microsoft and Yahoo can do what they did not achieve as separate companies, namely develop search algorithms that rival those of Google.

Anything short of that would result in one of the biggest destructions of shareholder value since the disastrous merger of AOL and Time Warner at the height of the dotcom boom.

If Microsoft succeeds, it will be able to extend its hold on the PC world to all aspects of our lives.

Bill Gates and his top managers are betting an awfully large part of the company in the hope of making it a success.

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