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Microsoft Yahoo Fallout


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Mergers and acquisitions in the technology industry have become more prevalent in recent years as the industry grows and matures. IBM purchased the Lotus Development Corporation in July 1995, which created a tremendous stir in the industry at the time. May 2002 saw the merger of HP and Compaq, two major companies in the industry, forcing the consolidation of many product lines and other corporate resources. Although controversial at the time, these purchases eventually became successful ventures.

After three months of negotiations that began at the beginning of February of this year, Microsoft's attempt to purchase Yahoo ended in May, with many implications for both Microsoft and Yahoo, their customers and the computer industry in general. Microsoft's intention to purchase Yahoo rose out of its goal to obtain a greater market share and foothold in web-based applications against its greatest competitor, Google. Microsoft believed that the purchase of Yahoo was its answer to this goal.

Yet, Google plays a relatively small role in the industry, with only two percent of its company's revenues coming from the sale of searching software to small businesses and offering its suite of Office-like products, hosted on its own servers, for $12 per user per month. Indeed, many businesses are beginning to look to Google for these applications, removing the need to host them on servers in their own organizations. However, Microsoft, whose software model is based on packaged software and the client/server approach to computing, where the major application resides on a server and end-users access this application through software installed on their local computers, was looking for a quick resolution to be offering similar products as Google and was looking to Yahoo as its panacea.

Rather than reinventing the wheel, Yahoo would have provided Microsoft not only with the web-based applications it seriously needed but the engineering capabilities for further development as well as the customer base and distribution potential. Microsoft's business plans typically have involved the purchase of an organization that provides software or service that it needs to maintain its dominance in the market rather than develop software or service in-house. Such practices date back to 1996 when Microsoft purchased Vermeer for its web-production software, FrontPage.

After three months of negotiations, discussions and ultimatums, Microsoft withdrew its offer in May, with repercussions for both companies that has left each endeavoring to determine its own place in the online community. Although Microsoft will need to amend its vision, adjust its plans and deal with the challenges that came about from the attempted acquisition, the real pressure rests on Yahoo, which needs to prove to the industry that the company is worth more than the $33 per share, Microsoft's final offering.

In addition to facing a somewhat uncertain future, Yahoo's stockholders wished to remain independent and now have that opportunity to remain so. In addition, Yahoo will need to deliver on many impressive plans and promises it made in the past three months and prove that it can succeed as an independent company. The burden is on Yahoo to demonstrate its worth of $37 a share, one of the seeds of contention during the negotiation, and to communicate in the very near future its strategies as an independent company.

Microsoft, on the other hand, has its own set of challenges which it needs to meet, including how it plans to build its own Internet strategy, having spent three months explaining why it needed Yahoo to do so. Search ads and display ads are one alternative but because Microsoft has the resources to do so, will most likely look around for other companies that could provide some of the products, services and innovative technologies that it hoped to gain from the purchase of Yahoo. Regardless, industry watchers feel that Microsoft needs to take some definitive steps in the near future to demonstrate to the industry that the fallout with Yahoo was not a major setback.

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