How Microsoft dodged the Yahoo bullet

How Microsoft dodged the Yahoo bullet

Summary: It was five years ago this month that Microsoft officially dropped its plan to acquire Yahoo for $47.5 billion. In hindsight, losing that battle was the best thing that could have happened to Microsoft.

TOPICS: Microsoft

All the talk this morning is about what Yahoo did this weekend, spending more than a billion dollars to buy a domain full of animated cat GIFs and naughty pictures.

But it’s worth taking a look back at the company’s history. Five years ago this month, Yahoo turned down an unsolicited acquisition offer by Microsoft that would have netted YHOO stockholders $33 per share. If you owned Yahoo shares five years ago and decided to stay the course, it’s been a pretty miserable five years, as this chart attests:



That might have been the biggest bullet Microsoft ever dodged. And it’s not just the $47.5 billion in cash that would have disappeared from the company’s bank accounts that would have been at risk.

The goal of a combined Microsoft-Yahoo was to compete directly with Google on advertising and search. It would have been the culmination of an acquisition spree in which Microsoft bought at least eight search and advertising related companies. And in an interview at the D6 conference five years ago this week, CEO Steve Ballmer still spoke bravely about advertising. But it was clear that drastic changes were afoot.

Given Google’s effective monopoly on search, it’s unlikely that adding Yahoo’s resources would have made a difference in total share. And that’s not just speculation. Three years ago, Microsoft and Yahoo signed a 10-year revenue-per-search deal that was supposed to create an effective Google competitor. It’s been a dud.

Instead, the failure to complete the Yahoo acquisition seems to have ended Microsoft’s dreams of being a giant in online advertising. There were no further acquisitions in that space, and last year Microsoft took a $6.2 billion writeoff of its biggest acquisition in that space, aQuantive.

What else would have happened if that acquisition had succeeded?

  • Microsoft management would have been distracted during one of the most crucial times in the company’s history, as it recovered from Vista’s real and perceived problems and prepared to launch Windows 7 and Office 2010 (those two products were still nearly 18 months away from public release).
  • Engineering resources would have been strained, at a time when much of the engineering work on multi-touch support for the next release of Windows was just beginning. Microsoft introduced multi-touch support in Windows 7 but it wasn’t fully integrated into the OS until Windows 8.
  • On a global scale, efforts to protect online privacy would have spiraled downward. One of the unintended consequences of Microsoft’s failed acquisition was that it de-emphasized the ad business and eventually turned online privacy into a potential competitive advantage. In early 2008, Microsoft’s advertising division had enough clout to veto a genuinely innovative privacy feature in Internet Explorer. Today, Do Not Track is enabled by default in IE 10 and Microsoft is attacking Google publicly and privately on its privacy flaws.
  • The efforts to make an ad-supported Office might have accelerated. Office 2010 included a Starter Edition (Word and Excel only) that was free with new PCs and ad-supported. Thankfully, Microsoft dropped Starter Edition completely in Office 2013, instead focusing on free Web apps as the right way to reach consumers.

After dropping its ambitions to become an online advertising giant, Microsoft chose to pursue a “devices and services” strategy instead. There’s no guarantee that this business model will succeed, but there’s also no question that Microsoft is better prepared to fight this battle than it would have been if it had been dragging around the weight of Yahoo for the past five years.

Topic: Microsoft

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  • Ballmer should have been fired for that

    But he's still there, ruining the place.

    Then again, if Microsoft bought Yahoo it would have fired Baller earlier and be better off now.
    • Ballmer's okay.

      The Xbox was a success under him, after all.

      It's nice to have competition in the console market.
      • Agreed

        Ballmer is disliked out of emotion. In reality, Microsoft's revenues have almost doubled. And they are staying relevant in a post iPhone/iPad world.

        Ballmer has steered away from a "software company", towards a "device and service" company. That change started 4 years ago! Under Ballmer.

        If he wasnt in charge, you might as well call then International Business Microsoft...because IBM is what they would have become.
        • That is all assuming that Ballmer did the best anyone could do.

          Ballmer missed most of the big changes happening to the market for the last decade+.

          Everything Microsoft is doing now is reactionary, because it fell behind. According to most accounts of Microsoft, they have found some success despite Ballmers leadership and not because of it.

          Just look at his policy of "stack rankings" and how harmful that was to the company. That is just one example.

          I can only imagine what Microsoft would be like with leadership that had real vision.
        • Go on thinking and saying that

          The competition needs all the help they can get.
          John L. Ries
          • I agree with Emacho

            MS missed most everything and/or did bad copies. Two examples Zune and Windows Phone... Let's not even start up about the iPhone and how famously Ballmer said it would never amount to anything....
        • Really????

          Revenues almost doubled? Ok, but what about market share? Take IE for example. Oh yeah dropped like a rock. What about OS adoption? Dropping! What about PC sales? Dropping. What about profit? On a plateau. How is that Windows Phone doing? A statistical error in adoption. Compare that to near death candidate BlackBerry? Oh yeah they are reviving themselves and growing market share again. Let's look on the server side? How is that market share thing doing? Dropping! Linux is eating the server side alive.

          Do I need to go on? Ballmer is squeezing his clients for more money plain and simple. The developer community has moved onto other technologies (Tibco language share), and yet here we are with Ballmer still in charge.

          No Microsoft is NOT IBM! IBM managed to create a kick arse computer that won in jeopardy. What has Microsoft done? Windows 8! WOW such innovation! IBM is actually doing innovation. Like for example their atom movie.
          • So far, this year Microsoft is outdoing IBM and Apple nicely

            And is on a par with Google...
            It's a mistery how failing so many times in so many areas, Microsoft is still pulling ahead, isn't it? :P
          • Because it's a monopoly

            Pre-installed on 90% of all PCs out there.

            It helps when the OEMs don't sell anything else.
        • as if that woulod be bad

          considering IBM has higher revenues than Microsoft
    • MS did NOT dodge the Yahoo bullet

      Ballmer tried to shoot himself on BOTH feet, and MISSED.
      • Correction

        IN both feet. That darn typist of mine .............
    • If he had pursued it to the bitter end, yes...

      ...but he didn't. Instead, he properly walked away; even though he risked losing face by doing so (and he strikes me as a man with a very big ego). Then he negotiated the Bing deal.
      John L. Ries
  • How Microsoft dodged the Yahoo bullet

    Microsoft did get lucky by not purchasing Yahoo but I don't think it would have been all the gloom and doom you would have made it out to be. If things started to go wrong Microsoft would have quickly restructured Yahoo to avoid any loss. They would have not let such a purchase just go down the drain. Microsoft is definitely better off now without Yahoo. The devices and services strategy is playing out well for them and they aren't dependent on any one device or service like Google is.
    • Agree...

      Almost $50 billion for Yahoo seems really expensive. And, to be honest, I'm a little surprised Yahoo is still around... and somewhat viable. I guess a lot of people still use their email & homepage.

      Either way, I agree that Microsoft is finally on the right path with Windows 8, Bing, Windows Phone, Surface tablets, Xbox, etc. They're bringing everything together under one OS... and may actually get there before anyone else... which is no easy feat when you have 1.4 billion users.

      Furthermore, I think firing Ballmer would be a major disruption... and harmful. Microsoft has finally righted its ship... why make the Captain walk the plank?
      • Agree

        Just because Windows 8 wound up being 8.1 Beta, (like Windows 3.0 wound up being Windows 3.1 Beta), Ballmer is still correcting course well enough, and hasn't yet hit an iceberg.......
      • re: Agree...

        "with Windows 8, Bing, Windows Phone, Surface tablets, Xbox, etc."

        Except for the Xbox, all of these have a very smal market share.

        "They're bringing everything together under one OS... "

        That's their biggest mistake yet ... touch belongs on handheld devices only, on desktops (and laptops) that's a very stupid idea.
      • At&T must be subsidizing Yahoo some as they share

        quite a bit. We have AT&T Uverse internet service (Was DSL) and our email addresses are accessed via Yahoo. ( As well there is an AT&T page on Yahoo dealing with TV programs that can be watched, as well as their email services.
        • I Got Banned for Life Saying This

          On a Yahoo AT&T Help Forum my first post said:

          AT&T and Yahoo deserve each other, they both suck.

          What incited the remark is no one at AT&T knew what an SMPT server was. AT&T also requires U-Verse users to register all email reply email addresses on Yahoo. Yahoo's page to do this would not accept multiple addresses.

          Some things do not change, it is still true today:

          AT&T and Yahoo deserve each other, they both suck.
          • Nobody Knew....

            " no one at AT&T knew what an SMPT server was"

            I don't know what it is either. But perhaps if AT&T had been asked what an *SMTP* server is, they might have been able to answer.