Microsoft Reboot!

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?

~V

Comments

[Victor Cook]

Daniel,

Thank you for your comments. I agree with your concern about a corporate culture clash. In fact, I'd bet their corporate cultures are behind the "cost per dollar" problem faced by both companies. A merger likely would just magnify the underlying culture issues.

You might be interested in the financial accounting dimensions of these problems. I review them in my audio slide show on "Enterprise Marketing Expenses." See http://breeze.tulane.edu/cookchapterfour/

~V

[Daniel A.]

I agree whole-heartedly with your analysis. The fact that Microsoft and Yahoo's leadership would even entertain combining resources, for a number #2 position in search, shows how misguided these enterprises are.

Yahoo has had a somewhat successful run with integrating media into their web offerings. Microsoft has done a poorer job of integrating any technology--even those directly aped from competitors--into their Windows/Office platform.

Additionally, the problem of corporate culture clash is very real. Opposing viewpoints and resistance to change have been the death-knell for mergers that were of much more obvious potential: AOL-TimeWarner, MCI-Worldcom, Daimler-Chrylser. Ask anyone that worked for those companies and they will tell you that these "mergers" never truly happened. The ballyhooed synergies were lost to protracted wars of corporate infighting and reorganizations. Yahoo-Microsoft would be as bad, if not worse.

This is a terrible deal for both consumers and investors. An idea best forgotten.