Is Microhoo A Done Deal?

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Lately, a merger between Yahoo! and Microsoft is looking more and more probable. Not only have reports been flying around that Yahoo! and Microsoft are in negotiations, but Yahoo!’s SEC filing last week (Tuesday March 18 2008) has added significantly more fuel to the merger fire.

The Yahoo! story

Several points in Yahoo!’s recent SEC filing seem to signal that Yahoo!’s management realizes acquisition is likely unavoidable. Here are some pertinent points from the filing:

  • The report clearly didn’t argue against a merger and it gave reasons why it thought the $44.6 billion dollar offer from Microsoft was low.

  • In the filing, Yahoo! says it expects revenue to balloon to $8.8 billion by 2010. This is approximately 24% higher than the Wall Street estimates of $7.1 billion.
  • Yahoo! is optimistic that its acquisition of Right Media (ad network) will help generate ad revenues. The filing said: “Display is a larger opportunity than search and we are positioned to extend our leadership in display.”
  • Regarding the Microsoft bid price, the Yahoo! filing said: “Yahoo! provides meaningful strategic value and warrants a significant acquisition premium above its equity value in a potential change of control transaction.”
  • Yahoo! argued a merger would give Microsoft a stronger stake in Asia (Yahoo! has several partnerships there). Regarding positioning in foreign markets, Yahoo!’s filing said: “Microsoft from sub-scale position to strong positions in search and display.”

It’s worth noting that even if the two companies reach a deal soon, it will take time for regulatory clearance and paperwork to be completed. And then, of course, the two companies will need to figure out how exactly they’ll come together. Until all the details get hammered out, we’re probably looking at business at usual (with the big three search engines) for at least the next 1.5 years.

The Microsoft story

For a couple of years, Microsoft has been positioning itself to take bigger stake in the PPC market. Here are some points worth noting on the Microsoft side:

(1) Microsoft has invested heavily in the paid search game

For the last couple of years, they have spent a serious amount of time and money getting their backend in order and systems and processes in place. They’ve invested in improvements to the user interface, behavioral targeting, and editorial review, to name a few. Their goal has always been to create a good foundation and then attempt to acquire additional market share and related search traffic.

(2) Microsoft has purposely preserved the quality of their traffic

If Microsoft wanted a bigger piece of the PPC pie, they could have bought market share from one place or another (e.g., AOL) or tinkered with their algorithm to allow broader match typing like Google’s expanded broad match and Yahoo’s Match Driver technology.

Currently, AdCenter matching technologies are pure and they don’t employ any type of stemming or broad matching technologies. In fact, in several verticals, we see higher conversions from AdCenter than we do in Google and Yahoo!. The next major hurdle is to increase traffic, which they hope to do with the Yahoo! acquisition.

(3) Takeover: hostile or amicable?

The immediate future of the combined companies, but longer term, the impact on consumers and the entire online search, display, and desktop app ecosystem, depends on whether the companies go the amicable or hostile route. From a legal and shareholder standpoint, it does not seem that Yahoo! can block Microsoft, so an attempt to do so without seriously credible alternatives will turn the bid hostile and lead to a so-called proxy fight.

As distasteful as it might be for proud Yahooers to make plans for the future Microhoo, from their SEC filing we now get early indications that they’re preparing to negotiate, not fight. For the good of both companies, consumers, and business partners, it would be quite a feat if Yahoo! could secure some real commitments to preserving the best elements of the Yahoo! brand, and to planning the future intelligently rather than gutting the company for its perceived assets. Handshake guarantees typically carry little weight post-merger, so goodwill would have to be combined with a serious Yahoo! presence on the board of directors, and long-term contracts for key Yahooers in positions central to the growth of the new company.

Currently, a dizzying array of specific decisions face the would-be Microhoo when it comes to the case-by-case treatment of which Yahoo! products and services will be folded into the new company, and which will be allowed to grow and develop on their own.

Mona Elesseily is director of marketing strategy at Page Zero Media, focusing on paid search campaigns and conversion improvement. She’s also the author of Page Zero’s Mastering Panama: A special report on Yahoo!’s new search marketing platform (August 2007). The Paid Search column appears Tuesdays at Search Engine Land.

Opinions expressed in the article are those of the guest author and not necessarily Search Engine Land.

Related Topics: Channel: SEM | Microsoft & Yahoo Search Deal | Paid Search Column

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About The Author: was recently voted the 2013 Most influential SEM. She is the Vice President of Online Marketing Strategy at Page Zero Media where she focuses on search engine marketing strategy, landing page optimization (LPO) and conversion rate optimization (CRO).

Connect with the author via: Email | Twitter | Google+ | LinkedIn



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