The Hindu Business Line : Yahoo! and other plays on the Internet

A company that is a target for takeover usually sees all activities come to a standstill. The future being uncertain, all long-term decisions would be put on hold. The need to meet the new challenge and respond to it distracts top management from their normal business of running the company.

C. Gopinath

Remember the time when the Internet started (and before it took over our lives)? It was a wonderful toy, attracting the best and brightest to write software for it, and it provided free access to all kinds of wonderful sites full of wonderful information. That was before people figured out that you could still provide some valuable services free while others paid for the service provider to make the money.

That is what the search-advertising business is all about and brings us to the most recent guessing game in town, namely, what will happen to Yahoo!

Takeover target

It all began in early February when Microsoft made an unsolicited bid valued at $44.6 billion (Rs 1,76,526 crore) to take over Yahoo! Microsoft was worried that it was losing out to Google for a strong position on the Internet landscape in the future.

The timing was great. Microsoft’s offer was a 62 per cent premium over Yahoo!’s slumped share price at that time (it had fallen 42 per cent over the previous two years), enough to get Yahoo! shareholders out of their depression. But Microsoft’s shareholders were not particularly pleased by the offer out of concerns of how the merger will work, and its own shares fell 12 per cent.

The business motives of Microsoft seem fairly straightforward. It has a miniscule share of 2.9 per cent in Internet search, compared to Yahoo!’s 12.8 per cent and Google’s huge 62.4 per cent. It wants a bigger presence there.

Search and ads

The fight, of course, is not whether you and I search using their software but whether they can sell our addiction to advertisers and make money out of it. When a user puts in a key word or phrase to search, these companies provide relevant sites, while displaying a banner ad and listing a set of sponsored links that are related to the search query. Those sponsors pay an amount that can range from 20 cents (Rs 7.90) to $3 (Rs 118.7) per click on their site that comes through the search. Armies of mathematicians and information technology specialists sit in the backrooms of these search providers working on algorithms to ensure that the most relevant sites are displayed, so they can auction the ad location to various bidders.

Online advertising is where the money is, a market that was estimated at $22 billion (Rs 87,000 crore) last year and expected to reach $80 billion (Rs 3,16,000 crore) within a few years.

Google on top

Google has been raking in a share of that as a cash cow (accounting for 92 per cent of its revenues), while it scours the rest of the landscape to think of what new companies to acquire (such as DoubleClick it bought recently) or what businesses to get into such as advertising on phones. Google’s power and reach is fast replacing Microsoft as the company to worry about and be scared of in the industry.

Yahoo!’s time

Yahoo!’s at play at an unusual time for the company. Its co-founder, Jerry Yang, had taken over just a few months ago promising new strategies to revive its glory. Also, the annual American Customer Satisfaction Index (from the University of Michigan) just reported that, for the first time since 2002, satisfaction of Yahoo! search at 79 per cent beat Google by a single point! To try and understand this figure that seems to contradict their respective market share position, the author of the index explained that market share reflects past behaviour while the satisfaction index portends what is to come. So if Yahoo! is on the cusp of better times, the question is whether it will have the chance to show its mettle. (Oh, did I mention that Google offered to help Yahoo! fight off the offer from Microsoft? When you have stopped laughing, we can continue.)

What can Yahoo! do in this situation? It has few options, and the one that is fast receding is that of staying independent unless it can motivate regulators to help it in that direction as we shall see below. Yahoo! has lost the initiative. It can try to get a better price from Microsoft, and has probably taken the first step in that direction by rejecting the first bid from Microsoft as being too low. After all, Microsoft is supposed to have offered $40 (Rs1,583) a share last year (compared to the current offer of $31 or Rs 1,227), when Yahoo! was not down and out and they were in friendly negotiations last year, which was rejected.

The options

Microsoft’s offer has set the cat among the pigeons. Microsoft itself may try to go over the board and appeal directly to Yahoo! shareholders, which will make the fight even more messy. Can Yahoo! find a kindly sovereign wealth fund that has a few billions lying around, and come in as a white knight! Will Yahoo! want to buy AOL’s search business? Will Ask.com, another small search firm try to buy AOL? It’s all up in the air. Now we can appreciate how appropriate the term ‘being in play’ is.

Anti-trust

One unknown variable in the external environment is how the anti-trust regulators would perceive the deal. And this is not just those in the US, who seem less inclined to interfere with companies’ attempts to shoot themselves in the foot, but also the Europeans, who have punished Microsoft in the past. The key question is whether the combination has the potential to reduce competition. This can be interpreted in various ways, such as whether we are looking at the market as dominance of the Internet broadly, or narrowly at the business of search-advertising. From the numbers, it does not look like an easy path.

Microsoft could argue that a Microsoft+Yahoo! combination is still only a small share of the search market, but that would make the market a duopoly. If Yahoo! outsourced its search-advertising business to Google that some analysts had argued for, that would make Google almost a monopoly, again a no-no from the regulators. So the regulators may suggest that Yahoo! would need to be broken up in unsavoury ways if one of these rivals wants to acquire it. That would make Yahoo! so much less attractive given the portal approach it has followed to the Internet. But then, perhaps, everybody would leave it alone to lick its wounds and try to recover from having been in play.

A shake-up

On paper, theorists would argue that it is a good thing for an external threat (such as a takeover) to shake-up a poorly performing company and make it work for better returns for its shareholders. The reality is always quite murky. A company that is a target for takeover usually sees all activities come to a standstill. This is due to various reasons. The future being uncertain, all long-term decisions, especially those that need major resource allocations, would be put on hold. The need to meet the new challenge and respond to it distracts top management from their normal business of running the company. The rest of the employees are usually in a tizzy. Some may leave for greener pastures, while the rest are hanging around the coffee machines discussing what is going to happen.

Earlier fiasco

The Internet is truly a chimera. Remember the other big merger, in 2000, that was touted as the wonderful combination of old and new media, and designed to take advantage of the promise of the Internet? I refer to the merger of AOL and Time Warner. We must admire the timing of Steve Case, then CEO of AOL, who managed to make the deal so attractive that TimeWarner thought it was blessed to merge with what soon turned out to be a problem. TimeWarner is still wondering how it can get rid of AOL, and swallow both enormous losses and even greater pride.

Mergers rarely work out as planned since the general investing public has not seen through what a fraud that term ‘synergy’ is. Most often, mergers stumble on the anvil of combining cultures. Would Yahoo!’s free-flowing style work well within the embrace of an aggressive, calculating Microsoft? The assets of these companies reside not in equipment, machinery or real estate, but on customer goodwill, new ideas, and the creative energies of its people translating those ideas into products and services. And these assets can vanish rapidly if not handled with care.

The non-commercials

In all this scramble for plays on the Internet so as to make money, it would inspire us to think of some outliers. Wikipedia.org is one. With the Internet becoming the most popular source of information for those with access to it, the Wikipedia remains a wonderful free encyclopaedia, in over 200 languages, and growing! It does not have advertisements, and maintains the original Internet charm of everyone participating not only in its use but also in building it as a valuable and reliable source.

Another is Craigslist.org, meant for communities to exchange for free or transact for a price, goods and services. There are other sites too, trying to keep the world as a simpler place. More power to them.

(The author is a professor of international business and strategic management at Suffolk University, Boston, US. He can be reached at cgopinat@suffolk.edu)

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