Yahoo bid could backfire lest Microsoft changes ways

What are the risks of such a union?

Microsoft's US$44.6 billion offer to purchase Yahoo is a dramatic statement from a company that delayed acknowledging the importance of emerging Web business models for so long, it faced becoming an also-ran in the Web 2.0 economy.

But the cultural implications of the move are so tricky that the deal could end up backfiring for both vendors if Microsoft doesn't take care to learn from its past and use Yahoo to transform its business, not just help bolster its unproven efforts in online advertising and hosted services.

The unprecedented deal, which would put a sizable dent in Microsoft's wallet, would be the largest purchase ever for the company. If Microsoft is willing to spend that much money, it also has to be willing to change some old ways of thinking to make the most out of the investment, analysts say.

To achieve this, analysts caution Microsoft to be careful not to view Yahoo as a one-trick pony, taken onboard only for its user base and infrastructure to bolster Microsoft's online advertising interests against Google. While this is certainly the primary reason for the deal, to make the most of it, Microsoft has to not only respect the strength of Yahoo's brand, but also be willing to let go of some of its own traditional proprietary interests -- not just on the product side but in its culture as well.

Microsoft has never been one to let go of its vision or proprietary interests too easily; when acquiring companies, it usually subsumes the products and services and brands them as its own.

While this has worked in the past because Microsoft traditionally has shied away from acquiring big-name or big-ticket items -- last year's $6 billion aQuantive deal was a notable exception -- it's not as simple to do this with a company like Yahoo, analysts said.

In the areas of online search and particular services, and as an online destination for users, Yahoo is a stronger brand than Microsoft. Microsoft must recognize this and be willing to give up some of its interest in new content and services branded, respectively, under MSN and Windows Live to make the deal successful, said Ned May, director and lead analyst for market research firm Outsell.

"The big question is, will Microsoft take this and recognize it for being a stronger property and migrate its efforts there, or will it try to push its own efforts out through Yahoo?" he asked. "Historically, there's no precedent for it to do anything but use [an acquired company] to get Microsoft's message out."

Though Microsoft and Yahoo are different types of companies and the union itself makes much more sense, Ron Schmelzer, analyst and managing partner with Zapthink, likened the deal to Time Warner-AOL, in which AOL's brand was damaged, not enhanced, after all was said and done.

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Elizabeth Montalbano

IDG News Service
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