What Microsoft gets for its $44 billion purchase of Yahoo!
The acquisition of Yahoo (Nasdaq: YHOO) by Microsoft (Nasdaq: MSFT) has been something that's frankly made sense for years. Microsoft has a lot of strengths, but it just hasn't been able to crack the nut of content creation (does it even own a property that has any meaningful content prior to this acquisition?), particularly the semi-mythic user-generated content, and its attempts at competing with Google (Nasdaq: GOOG) in the advertising space have also proven disappointing.
But still, $44.6 billion is an extraordinarily large amount of money, even if it's mostly Microsoft stock. It leads to the question: what does Microsoft actually get for its investment?
A quick visit to the Yahoo press room shows that first off, Yahoo has a pile of free software you can download:
Perhaps the hidden value is within Yahoo Research, but last I checked, Microsoft's own research labs had many of the best and brightest researchers in the world: even the coolest projects at Yahoo Ressearch don't seem very exciting. Their key projects are things like Zookeeper, a distributed computing effort, Bracketology, a fantasy stock market (this is research?), PNUTS, a net-based database system. Research papers published by the group show their Yahoo-directed focus too, with highlights including "Challenges in Searching Online Communities", "Optimal Deliver of Sponsored Search Advertisements Subject to Budget Constraints", "Just-in-Time Contextual Advertising", and "Semantic Associations for Contextual Advertising".
Yahoo Next has some interesting projects percolating, however, including Blog Remix for audio remixes, Kickstart (a sort of Facebook/LinkedIn hybrid), TagMaps, a geotagged interface to Flickr, Map Mixer which lets you create your own map overlays (a darn powerful concept: this is the basis of some terrific startups like AWhere) and Pipes, an interesting multi-site mashup toolkit.
Let's step back a bit further and look at what properties Yahoo also owns, because so far I haven't listed anything that'd be worth even $50 mil, let alone $44 billion.
Yahoo has acquired Right Media, Flickr, Rivals.com, MyBlogLog, AdInterax, Jumpcut, Gmarket (well, a stake in Gmarket, not the entire company), Pixoria, Kelkoo and various others that didn't make it onto the radar screen. Of those Flickr is the home run. Maybe MyBlogLog was a valuable acquisition, but it's very small potatoes and there are definitely plenty of competitors in the "help bloggers network" marketplace. Most of the others reflect Yahoo's continued inability to master the online advertising space and compete effectively with the Google AdWords / AdSense juggernaut.
Let's turn our attention to the core Yahoo properties instead. Growing from the original sumo wrestling bookmarks list, the true core of Yahoo's business remains Yahoo Search, but they've had a heck of a hard time remaining relevant, and it's Microsoft's search team that's been more aggressively innovating in this area. There's Yahoo Mail, which is undeniably popular, but Microsoft already has the even more popular Hotmail service. (Both, of course, are absolutely riddled with spam and spammers, so most cogniscenti have left them for Google's Gmail service).
Going back into the retro 90's Web, Yahoo still has Geocities, which I expect might remain popular with a certain segment of the online population, but given that Yahoo 360 failed to dislodge MySpace (Facebook, LinkedIn, Beebo, etc etc ad nauseum) it's hard to imagine why Yahoo even keeps Geocities around.
So what's left? The only major property that I haven't mentioned, one that really is a cornerstone of Yahoo's business, is Yahoo Shopping and its mirror, Yahoo Shops (aka "Yahoo Small Business"). Now that's something with some tangible value: Yahoo Shops have an excellent reputation in the industry and there are thousands of merchants selling a wide variety of goods through this program. More importantly, it generates ongoing revenue for Yahoo.
But still, $44.6 billion is a hard number to wrap your brain around. If we project it as being based even loosely on two years of revenue, we're talking about $1.85 billion/month. Meanwhile, Yahoo announced Q42007 earnings of $1.403 billion with a reasonable upwards trend:
Source: Yahoo 4Q2007 Earnings Report: Slides
Even then, do the math and we're talking about Microsoft paying an extraordinary multiple of earnings. Extrapolate based on Q4 earnings along and we're talking about a gross revenue of $5.6 billion/year. That means Microsoft's paying 7.9 years earnings. On a company that's really been strugging to find its way and remain relevant in the Google Era.
This all just makes me say Hmmm....
My opinion: Yahoo is a good acquisition for Microsoft and a reasonable fit with its many properties, but it's ridiculously overpriced, and would be an overpriced transaction at $20 billion. Even that would be a premium over the current Yahoo share price.
It's hard to interpret this as other than a last-ditch defensive ploy by these companies to be able to compete effectively against Google, but here's the core problem with that strategy: neither company has a Google killer either in its current offerings or known future offerings. Tip for Steve Ballmer: Companies don't win because competitors offer alternatives that are "almost as good".
Next up, the most challenging facet of any acquisition: merging corporate offerings and company cultures. Most acquisitions fail at this point, will these two behemoths be any different?
Further reading and analysis: Microsoft's press release about the acquisition offer, Seeking Alpha's analysis and interesting commentary from Paul Kedrosky, Duncan Riley, Doug Caverly, Andy Beal, and Danny Sullivan.
Posted by Dave Taylor at February 1, 2008 8:22 AM
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