In my post on Microsoft’s $8 Billion Problem I suggested that Double-Click might offer a solution to its sagging value/revenue multiple – 6 compared with Google’s 14. But, I didn’t take the Yahoo option seriously until this morning when Andrew Ross Sorkin contributed the following to a Deal Book report in the New York Times:
Microsoft has made a preliminary overture to Internet giant Yahoo, and the two companies are in very early discussions about a possible merger, according to people briefed on the discussions.
Then this moring Henry Blodget asked (and answered) these questions in his blog:
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
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.
Given the pre-market pop in Yahoo’s shares others apparently are taking this report seriously too.
So, this brings me back to Microsoft’s $8 billion dollar problem. That problem is based on the company’s enterprise marketing efficiency compared with that of Google.
Gerstner's cost per dollar (CPD) rule is simple and revealing: how much does it cost MSFT to generate a dollar in sales revenue compared with Yahoo and Google? It's one of two measures of enterprise marketing efficiency I use in my audio slide show on The Battle for Your Desktop.
In 2006 it cost MSFT $0.46 to generate a dollar in revenue, compared with Google’s $0.27 per dollar in revenue. This is Microsoft’s $8.4 billion problem [$44.3*(0.46-0.27)]. How about Yahoo? It cost them $0.42 per dollar. So Yahoo has a $1 billion dollar problem compared with Google [$6.4*(0.42-0.27)].
Do you think combining the two and creating a $9 billion problem will help much? Even if Yahoo-MSN is spun off as Henry recommends? In the history of financial markets has it ever really helped for two companies suffering from the same symptoms to join forces?