Microsoft + Yahoo: Can the Deal Get Done?

I woke this morning to the news that Microsoft has tendered a $44.6 billion ($31/share) offer to buy Yahoo in a cash and stock deal. (And here I thought I was getting up early to pack for vacation!).

The acquisition has been rumored and speculated on for a year or more, and even in the dawns early light there’s plenty of commentary on whether the deal should or should not happen, whether it makes sense, what the combined company might look like, what Microsoft ought to do with the Yahoo asset.

When rumors of a possible merger circulated last May, Om Malik called a Microsoft-Yahoo merger a “bad idea.” He wrote:

Marrying a company with Internet DNA (Yahoo) with another who can’t take a step forward without turning its neck twice (looking back at the PC) is not that easy. Will this deal become the 21st century version of AOL-Time Warner merger, and a high-water mark for the current boom?

One-time Wall Street wonder-analyst Henry Blodget called a potential merger a “smart strategic move” but advised Microsoft to create a new company Internet company in the process.

Would it be a smart strategic move for Microsoft and Yahoo to combine forces? Absolutely. Is the best way to do this to have Microsoft suck Yahoo into the massive Windows/Office empire? Absolutely not. If Microsoft buys Yahoo, Microsoft should immediately spin the Yahoo-MSN business out as a separate company. If it doesn’t, both Yahoo and MSN will die

Now that the deal has gone from rumor to announcement, there’ll be plenty of jockeying around these two, and a myriad of other, opinions. I’ll leave that speculation to folks who are far better arm-chair quarterbacks than I. But what I will say is this:

Not so fast.

I’ve seen this play before and while (for the record) I think this is a brilliant move on the part of both companies, I question whether it’s a deal that can get done. Remember the mid-90s when Microsoft tried to buy Intuit in a play to own the small business market? Well, I do. After the offer comes the regulators and after that six months of wrangling before both companies had to agree that they couldn’t come to final terms that would also suit the suits in Washington.

The detritus of that aborted merger took years to clean up. Intuit employees, once proud Davids in a battle with Goliath – a battle in the finance software market it looked like it was winning — had first reset its thinking that Goliath may have won after all, only to find the battle would wage on after all. It took considerable time for Intuit’s people to get their heads back in the game and I would argue the company was never quite as competitively hungry in the personal finance software market after that.

And, of course, there were years of insider trading investigations that compromised several Silicon Valley execs and their families.

Intuit has healed from that on-again-off-again proposal, and certainly is a stronger, smarter, better company today than it was a decade ago. But it took years for the company to get over the jilted deal.

This Microsoft-Yahoo proposition smells a lot like that ill-fated Intuit proposal. The consolidation of two significant networks will make regulators look sideways at the deal, I’m certain. On one hand, the combined companies do make an important counterweight to Google. On the other (and I think this is the hand that will win out), the combined assets may consolidate the advertising market and combine (and thereby limit competition) too many consumer Internet services to pass muster with regulators.

I may be wrong, and it many ways, I hope I am. But even while the shareholders and employees are sipping mimosas this morning, they need to be prepared if they should be left at the alter.

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