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Keeping up with the (Dow) Joneses

Rumblings of a Microsoft-Yahoo deal may not have panned out, but in the merger world, the pursuers and pursued are still out in force.

In a flurry of activity last week that some would say defied good business sense, media and entertainment companies and a few troubled Internet portals suddenly became hot acquisition targets.

The financial news service Reuters Group was approached about a takeover by an unnamed company, The Wall Street Journal reported Friday. British music group EMI said it had received a number of takeover inquiries, Reuters reported that same day.

Back in the States, Time Warner Chief Executive Richard Parsons told the Associated Press Friday that several private-equity firms told him they were interested in buying his company's problem child, AOL. To top it all off, rumors that Microsoft was in talks to buy beleaguered Internet portal Yahoo briefly resurfaced.

Of course, earlier in the week, in a move that probably set off all this activity, Dow Jones, which publishes the Journal and a number of other online and print news outlets, said it received a takeover offer from Rupert Murdoch's News Corp. Dow Jones ownership rebuffed the $60-per-share offer.

So why all this takeover talk? Isn't Yahoo supposed to be a sinking ship, AOL a has-been, and traditional music sales a dead-ender? Isn't buying a big media property supposed to be a bad idea in the age of social-networking Web sites and so-called citizen journalism?

Maybe not, if all this wheeling and dealing is any indication. An historic rally on Wall Street has given a number of profitable but slow-growing companies a valuable stock "currency" to make acquisitions and expand their businesses. And the bigger a company is, so the theory goes, the easier it is to squeeze out expenses and compete in a tough market.

In the software industry, it's the rationale Oracle CEO Larry Ellison used to justify his multibillion-dollar spending spree on competitors such as PeopleSoft and Siebel Systems. To Ellison's credit, the high-risk gambit is so far paying off.

Now that bigger-is-better theory is being taken for a spin by media moguls eager to increase their stake on the Internet. And make no mistake, this isn't about print media. With the exception of Dow Jones (which has several successful Web properties), traditional newspaper and magazine companies have been noticeably left out of the hubbub.

Barry Parr, media analyst at Jupiter Research, said the time is ripe for media consolidation as the online market matures and the user growth rate slows, slimming the possibilities for so-called organic growth. "If you are looking for a way to recapture your traditional growth rates in the context of the Internet, acquisitions look mighty attractive," Parr said. "It's also a phenomenon of the booming stock market right now."

"We're going to see more of this. It's the right moment," he added. "Companies whose stock is doing better than the market are going to be in a position to do more acquisitions."

Quick-growth opportunities
Ironically, it wasn't that long ago that many industry experts were arguing that media conglomerates were big, unwieldy entities to be avoided. But most industries careen from consolidation to breakups as market conditions change, said Charles Moldow, a general partner at Foundation Capital and a former mergers and acquisitions banker at Merrill Lynch.

"Companies believe they need scale to compete and they aggregate, and then they conclude that they have locked value that the market doesn't appreciate and they break them apart," Moldow said.

At the moment, companies are looking to buy in order to quickly grow their businesses in a booming Internet market, said Ellen Siminoff, chief executive of search marketing firm Efficient Frontier and a former Yahoo senior vice president of entertainment and small business. "Digital media is real; people are active in it and companies want to have scale," she said. Plus, "transactions usually happen all at the same time...The Google acquisition of DoubleClick may have begot Yahoo's Right Media purchase."

The biggest takeover buzz was over a deal that's least likely to happen. and published articles Friday morning citing anonymous sources saying that Microsoft and Yahoo were in talks to either merge or somehow combine their online assets.

However, the Journal backpedaled in a story hours later, reporting that sources were saying the merger discussions were "no longer active" and that Yahoo was not interested in merging with Microsoft. Representatives from Microsoft and Yahoo declined to comment on the reports.

It wasn't the first time reports of discussions between Microsoft and Yahoo surfaced: the Journal reported it a year earlier, also on the eve of Microsoft's Strategic Account Summit, an annual event for online advertisers being held this week. (Yahoo CEO Terry Semel is speaking Wednesday at the Microsoft event in Redmond, Wash.) And it may not be the last given the difficulty the companies are each facing as they attempt to narrow the gap with Google on its $10 billion-a-year search advertising business.

Industry experts noted that Microsoft buying Yahoo might be a stretch, given that one of the biggest obstacles to any acquisition is Microsoft's historical reluctance to make big acquisitions. As a result, the company has lost out on a number of deals in recent years only to see them go to Google. Google's acquisition of DoubleClick is one example of that, its advertising partnership with AOL another.

There's no question Yahoo and Microsoft are losing ground to Google. The search king has 32 percent of the U.S. online advertising revenue, compared with Yahoo's 18.7 percent and MSN's 6.8 percent, according to researcher eMarketer. Google has more than 75 percent of the paid search ad spending in the U.S., compared with Yahoo's 16 percent, the firm said. As far as share of searches in the U.S., Google has more than half to Yahoo's 22 percent share and Microsoft's 10 percent, according to Nielsen/NetRatings.

"Yahoo is at one of the many crossroads in its history right now, trying mightily to compete with Google," Parr said. But "I'm not sure being part of Microsoft is necessarily the right path for Yahoo to be solving its problems."

Meanwhile, Microsoft's efforts to compete with Google on consumer Internet-based services, rebranding MSN services as "Live," for instance, have foundered, and its efforts in search and the keyword advertising market, with its new AdCenter system, have failed to gain traction.

A combined Yahoo and Microsoft would be a powerhouse in display advertising and audience, but Yahoo would see limited benefit, relatively, and Microsoft would most likely struggle dealing with an additional Yahoo brand, said Charlene Li, an analyst at Forrester. "I believe that a merger won't be in the works anytime soon," she wrote in a blog posting. "More logical would be partnership agreements where the strengths of each company are shared."

But a Microsoft-Yahoo combo could backfire, Foundation Capital's Moldow said. "In the end I don't think you can merge assets and create organic growth," he said. "You don't get a pure breed by breeding two mutts, not that I'm calling MSN and Yahoo mutts."

CNET News.com's Ina Fried and Dawn Kawamoto contributed to this report.
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