Ready to Rumble: Microsoft-Yahoo! vs. Google | AMR Research

Ready to Rumble: Microsoft-Yahoo! vs. Google | AMR Research

The last minutes of January were barely off the clock when Microsoft made a $44.6B cash-and-stock bid for Yahoo!. Microsoft is offering $31 per share, a 62% premium over Yahoo!’s closing stock price January 31. If I were Yahoo! co-founder and CEO Jerry Yang, having recently stepped back into the lead role only to deal with executive departures, disappointing results, and layoffs, I’d be ecstatic that Steve Ballmer has taken Mick Jagger’s offer and has come to “my emotional rescue.”

When I saw the news flash on a television as I entered the gym, I had three reactions:

First, it’s a lot of money for a company that continues to fall far behind Google in revenue, market share, market valuation, profitability, and mindshare. The offer is nearly seven times last year’s revenue.

Second, can Microsoft recoup its investment? I use My Yahoo! every day … for free. When I talked about this with one of the investment gurus who belongs to my gym he said, “If Yahoo! provided the same services for just a penny per subscriber per year, they would lose 50% of their base immediately.” While I’m not sure that’s true, his point is that we’ve come to expect Yahoo! and Google functionality will be free. The cost is offset by the paid ads that no one admits to clicking on.

Third, can Microsoft retain the key Yahoo! developers and sales stars? There is so much venture money in Silicon Valley chasing proven talent that it may be hard for Yahoo! employees to accept Microsoft’s planned retention packages in lieu of the opportunity to join the next Google. How ironic is that?

On the flip side, if Microsoft really wants to slow or stop Google in its march across the enterprise, did it have any other choice? As I was trying to finish writing, Jonathan Yarmis and Jim Shepherd came to my office arguing passionately that this deal makes sense for Microsoft. To make sure his points were heard, Jonathan teamed with Chris Fletcher and Jim Murphy on a companion piece.

Zimbra as hidden jewel for Microsoft Live?

When I think of Yahoo!, I think of my portal. In considering the Microsoft-Yahoo! combo, I initially overlooked Zimbra. Yahoo! bought the collaboration software vendor last September for $350M. I first wrote about Zimbra, last April, saying:

“When I first saw it, my reaction was that this is what SAP and Microsoft are trying to do with Duet. The Zimbra Collaboration Suite is designed to allow PC users to add or build new capabilities on top of their preferred desktop standard (like Microsoft Outlook or any of its competitors). The company provides a wide range of Zimbra-developed and third-party “zimlets” that allow users to access Google maps, VoIP services, data sources (such as Wikipedia and catalogs), enterprise applications, and third-party services such as travel.”

Zimbra’s software would be ideal for extending—some would argue saving—the Microsoft Live initiative. It certainly sets up an interesting play against Google Apps. Does Microsoft Zimbra escape the scrutiny of the U.S. Department of Justice?

Meanwhile, Google shares get walloped

Ironically, Google employees with options at ridiculously high strike prices may be looking for the next Google, too. Shares of GOOG were getting spanked at opening February 1. By 11:30 a.m., the stock was trading at $513.01, down $51.29 or more than 9%. This is a far cry from the peak of $747.24 reached last November. At the current price, Google still enjoys a market cap that tops $160B. That’s more than $100B higher than SAP ($57.58B) and $56B higher than Oracle.

While some of the sell-off might be because of the threat of Microsoft emerging as a stronger competitor, the market has reacted negatively to Google’s recent earnings report. The company said that 4Q07 profits and paid clicks had grown slower than the previous three quarters. A fierce debate has ensued over whether Google will be helped or hurt by the long-predicted U.S. recession.

What do you think?

Is Steve Ballmer making a smart bet, or could he have waited six months and bought Yahoo! at a fraction of today’s price? If the deal goes through, will Microsoft be able to keep Zimbra or will it be seen as having too much power on the desktop? Is Google’s recent slower growth rate in profits and paid clicks a sign of saturation or just part of the ebb and flow of its dynamic business model? As always, I welcome your feedback and ideas—brichardson@amrresearch.com.