Microsoft’s big deal

Microsoft’s bid to acquire Yahoo! Inc (Yahoo) for a consideration of $44.6 billion is an acknowledgement of Google’s success in the search and advertising space, areas that Microsoft has been going after, with little success.

The merger also makes sense for Yahoo, which has been struggling to please investors for a while now. Current indications of a slowdown in the US economy seem to have affected Yahoo’s guidance for 2008 revenues, which are expected to be lower than earlier analyst estimates.

Its recent statements showing optimism for 2009 signalled to investors that a turnaround isn’t going to happen in a hurry. Already impatient investors could well give Microsoft’s offer the thumbs-up sign.

For Microsoft, the additional gain lies in the opportunity to protect its Office Suite business in the long term. The basic edition of Google Applications, which offers word-processing and spreadsheet services on the Net, is free. While only a relatively small number of people use it now, it is bound to increasingly eat into Microsoft’s pie. Yahoo’s online presence and experience are superior to Microsoft’s.

The former’s online engineering expertise could well help Microsoft grow the Office suite into an online avatar over time, without sacrificing margins too much. The recently launched Windows Live from Microsoft is a starter but market penetration is not yet a reality.

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Another plus from the merger is that it would allow Microsoft to instantly expand, in terms of subscriber numbers for e-mail, messenger and other such services, in the online world. Some even debate that Microsoft’s interest in Yahoo also stems from the possible reach into small businesses that the acquisition would give Microsoft.

The data-centre business that both Microsoft and Yahoo have offers significant opportunities to save costs. Statistics on the Web indicate that data centres typically run at a low, 20 per cent utilisation levels.

Consolidating resources on that front could generate huge cost savings. Overall, Microsoft believes that cost savings could amount to a billion dollars a year. Finally, Microsoft, which has faced protracted legal problems related to anti-trust and market-domination issues for years now, claimed in its letter to Yahoo that “today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition” - a clear reference to Google.

It remains to be seen if a combined MS-Yahoo entity would not invite anti-trust suits, especially in Europe, where the laws in this realm are strict.

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