- Combining weaker competitors doesn't help. The automobile industry provides some excellent analogy. Recall Ford's acquisitions of Jaguar, Land Rover and Volvo. If you don't, it's no surprise. Ford bought Jaguar for $2.5 billion in 1989 and Rover for $2.7 billion in 2000 and is selling both to Tata Motors for $2 billion. Ford has not done much better, losing $12.6 billion in 2006 and losing $2 billion in 2007. DaimlerChrysler suffered a similar fate. Eventually, 80% of the $36 billion investment in Chrysler was spun off for $7.4 billion to Cerebus Capital Management LP. During this time, Toyota continued their ascendance to becoming the number one car company in global sales.
Similarly, both Microsoft and Yahoo! were once leaders in their respectively business segments. While still very strong, they are continue to lose market share, dominance and show few signs of disruptive innovations for the future. I don't believe a merger will change this situation.
- Integration will be very challenging. From what I have read, Microsoft and Yahoo! are two very different companies. Having participated in a major corporate integration (and several corporate restructurings,) I can attest that they aren't easy. Culture, processes, and geographical locations make it difficult to seamlessly integrate.
- The competitive advantage isn't crystal clear. To me , Microsoft's advantage in personal computer software combined with Yahoo!'s second place search and contextual advertising doesn't seem to be a winning combination. It isn't clear to me how Microsoft's expertise can help Yahoo! compete better with Google's search and advertising or vice versa.
A clear competitive advantage could occur when one market leader acquires another market leader. For example, a merger of Amazon and Apple would create a company with innovation leadership in both supply chain and design. To me, such a combination would create a new formidable competitor.
Microsoft's bid for Yahoo! has convinced me that Google won't have much meaningful competition in the short term, either from each company separately or once the acquisition is completed. Based on this news, I feel confident in buying more shares of Google, especially at current prices. On Friday, February 1, 2008, I bought another 10 shares at $521. I will look to buy additional shares next week.
Full disclosure: I own shares of Google and have no positions in Microsoft or Yahoo!
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This is not financial or advice. Please consult a professional advisor.
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