Professor Bainbridge...on law, politics, religion, culture & food

Microsoft-Yahoo Talks: Show Me The Money

Here we go again:

Investors were quick to respond to Microsoft’s bid to buy Yahoo — they bought up plenty of the Internet company’s stock on Friday, pushing Yahoo’s share up by nearly 50 percent to $28.38 by the end of the day.

But amid the buying frenzy, those who remained doubtful about the deal’s prospects for success could be forgiven. After all, this is hardly the first time a Microsoft-Yahoo deal has surfaced.

I am not sure that I see the logic to this acquisition.  There are no self-evident operating synergies in this deal.  Likewise, this acquisition eliminates no quasi-rents.  So the two strongest justifications for strategic acquisitions seem to be absent.  It is certainly true that companies often use acquisitions to build market power.  The bidder buys one or more of its competitors so as to increase its market share and thus gain a competitive advantage.  It is for this reason, of course, that the antitrust laws are concerned with takeovers.  Yet, one wonders whether MSN can solve its failure to successfully compete with Google by buying Yahoo.  Will they merge MSN and Yahoo’s search?  If so, what is that buy Microsoft that they can’t do internally?  What if they do with the rest of Yahoo, moreover, such as the Internet connection over which I will be posting these remarks?

And, another thing.  Doesn’t Microsoft have enough to do fending off Apple’s recent gains, while protecting Office from any potential competitors?  Indeed, it is not the long-term threat from Google in OS and Office replacements rather than search?

Or am I just feeling grumpy because I suspect the Microsoft acquisition of Yahoo will cause my decrepit home Internet service to suck even worse?

Update: Larry Ribstein seems skeptical too:

Obviously the 62% premium reflects an assumption of significant synergy. But where does this supposed synergy come from? ... It’s already evident that combining these two huge firms will be a logistical nightmare. With respect to expanded R & D: do the firms have complementary patents that can’t otherwise be licensed?

As Larry notes, there may be some marketing synergies between the two, but we have been down that road before.  Does the name AOL Time Warner ring any bells? As Gordon Smith notes:

What is the plan for the new company? The Ballmer letter mentions the dreaded S-word (synergy). But are these supposed synergies real? Elsewhere, Steve Ballmer stated, “The Windows experience increasingly needs to embrace the Internet.” Umm ... yeah. Microsoft hasn’t tried that before. So what happens to all of the competing pieces of these companies?

So many questions. At the moment, however, this sounds more like Time-Warner/AOL 2.0 (or the “deal of the dinos") than Google.