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Microhoo: What might have been

CNET News' Stephen Shankland explores an alternate history: what would the world look like today if Jerry Yang had accepted Steve Ballmer's offer to acquire Yahoo?

A year ago Sunday, on February 1, 2008, Microsoft Chief Executive Steve Ballmer told the world his company wanted to buy Yahoo.

Despite months of discussions, the deal never materialized, distressing many Yahoo shareholders and hastening Yahoo's replacement of CEO Jerry Yang with Carol Bartz. But what if Yang had gotten up on the other side of the bed one day a year ago and led his company to accept the offer?

It's impossible to know what would have happened, of course. But an exercise in speculation can be illuminating, as Philip K. Dick showed with The Man In The High Castle, a novel in which Nazi Germany and imperial Japan won World War II.

So let's suppose that Yahoo agreed to Microsoft's acquisition offer after bargaining Microsoft up a notch on the price tag to, say, $31 per share from the original $29.

First would have come the challenge of antitrust approval. But the Justice Department has shown itself to be more concerned with checking Google's power, taking Microsoft's side when it came to the ill-fated Yahoo search-advertising deal with Google.

The European Union has shown more antipathy toward Microsoft, but it, too, likely would have been spooked enough by Google's might that it would sign off. And given that the EU is only now getting around to the issue of Microsoft bundling a Web browser with its operating system, any big compunctions about Microhoo probably wouldn't have set in until 2015.

So Microsoft and Yahoo probably could have cleared that hurdle, but not quickly, and there are other details to reckon with, so let's suppose that the deal closed in August. Yahoo shareholders would have received a chunk of Microsoft shares and a wad of money that looks princely in comparison with the present $11.74 value of their Yahoo shares.

Sure, there would be some bellyaching, but all those institutional investors who were publicly griping about Yahoo's management would have been mollified--especially because revisionist history or not, the economy in August 2008 already was well on its way downhill, and Yahoo's stock likely wouldn't look so great.

So next up would have been the big challenge: integration, which, as former Sun Chief Executive Scott McNealy famously described it regarding the merger of Hewlett-Packard and Compaq Computer, is like watching two garbage trucks collide in slow motion.

Executives fond of competing pet projects would be pitted against each other, tooting their horns and trying to fend off others' with candid assessments--and Yahoo already had enough internally competing projects on its own, as documented in Brad Garlinghouse's Peanut Butter Manifesto.

But Microsoft actually saw the HP-Compaq merger as an example of how to make Microhoo happen: pick a product and go with it, rather than mess with grueling efforts to combine separate and often incompatible properties. So in all likelihood, Microsoft would have treated the acquisition with the alacrity it deserved.

Integration hell
Some parts of the Microhoo integration would have been relatively straightforward. First, top management.

Given that we've already rewritten history with Yang signing off on the deal, which implies that he would have gotten past any over-my-dead-body, burn-the-furniture attitude, he probably would have stuck around a year for appearances' sake--and he's a helpful sort of fellow who probably would have worked at least for a time to try to hand off his baby to its new parents. It wouldn't be easy, but Yang at least already has years of experience reporting to another CEO.

So which company has the better brand online? Yahoo.

Microsoft has been hobbled by its MSN vs Live branding muddiness, and the Yahoo brand has long history of great recognition. In April 2008, Yahoo's front page had 61 percent portal market share to MSN's 20 percent, according to Hitwise. But brands live a long time, and with the merger only closed for a few months by now, Microsoft probably wouldn't have had much of a chance to make big changes.

Technologically, Yahoo and Microsoft are worlds apart. Yahoo's widespread use of open-source software and fondness for the Firefox browser would raise hackles all over Microsoft. But for the sake of expediency, and to avoid spooking the Yahoo administrators and coders who actually know how the Internet property is wired, Microsoft almost certainly would have left things stand as is for at least a year. It had already had undergone the long and painful experience switching Hotmail from Unix to Windows.

Philosophically, though, Microsoft and Yahoo are converging, partly because the Internet is only becoming more important and partly because they're being driven in the same direction by Google's competitive threat. Both want sophisticated online services, both want a better search site with more traffic, both want to be a hub for people's lives on the Internet, both want to be an unavoidable part of online advertising.

Service winners and losers
The nitty-gritty of integration would have involved figuring out what to keep when the two companies had directly competing offerings. Yahoo's got the traffic, it's got the brand, and its services in general probably would have come out ahead.

Search would have been an obvious decision: keep Yahoo's search engine, redirect Microsoft search traffic to it, and get the combined engineering team cracking as soon as possible. It has more volume and more advertisers. The tricky part would be migrating advertisers to Yahoo's technology, but Microsoft would have a huge incentive to build as much critical mass as possible to try to check Google's dominance as soon as possible.

Yahoo has another big asset: Yahoo Open Strategy. Even in the real history, YOS is only just arriving now, but even a year ago, its potential was clear: it offers Yahoo users more to do online, energizing Yahoo properties by linking them together with social activity and building them into the broader fabric of the Internet.

Yahoo took ages to retrofit its site with the Yahoo Open Strategy technology, including interfaces that can broadcast user activity such as rating a movie; delaying YOS even more by mashing it up with Microsoft's online sites would have increased its risk of irrelevance.

With some big properties, a type of merger would be needed. With Yahoo Messenger vs. Windows Live Messenger, the companies already have done interoperability work, easing the pain of merging two largely incompatible networks into one.

The ugliest part would have been e-mail. Each company already has two options--Microsoft's Exchange-Outlook combination for businesses and Hotmail for consumers, and Yahoo's Zimbra for businesses and Yahoo Mail for consumers. Two e-mail offerings already are too many, and four are way too many, but e-mail is a core part of customers' lives, and it would have been hard to move gracefully.

So by this time in the companies' merger, users probably would see nothing different. But if Microsoft were smart, it would have determined that Yahoo Mail had the better technological underpinnings, in part because of Yahoo Open Strategy, and begun steering new sign-ups to it. Perhaps a migration tool would be released, or at least under way, for those who want to change manually.

With Yahoo part of Microsoft, one big project would look very different: the cloud-computing version of Microsoft Office, accessed via a browser. The combination of Microsoft's existing Office customer base and Yahoo's online customer base would have provided a much better rival to Google Docs, especially when it comes to attracting business customers who are more likely to actually pay for a reliable, supported service.

Not everything would have gone well for Yahoo projects, though. The same scrutiny that Yahoo properties are undergoing now, under the Bartz administration, would have begun months earlier and likely with less sympathetic eyes. With new bean counters in charge, Yahoo sites that didn't pass muster would have been axed with less hesitation.

Merging in an ugly economy
And that cold calculation likely would have gotten colder because of the economy.

By the time the acquisition closed, signs of the economic troubles would be apparent. Microsoft shareholders, seeing their stake diluted and their cash reserves depleted by the acquisition, could have become a significant issue. Microsoft's flexibility to acquire other companies, lavishly fund research with cash, or pursue other big-picture changes would have been significantly decreased.

Yahoo's deteriorating ad revenue would have become apparent, likely spawning a collection of Monday morning quarterbacks. After all, a better time for companies to consolidate is by snapping up weaker companies more vulnerable to economic swings. Microsoft wouldn't have been buying Yahoo at its peak, but the accountants in Redmond likely would be worrying about goodwill impairment charges.

Yahoo employees, spooked by the bad economy and Google's continued dominance despite it, might have been happy about having a more stable employer and a better shot at taking on Google, cultural clashes notwithstanding. But the reality of layoffs would likely have swept away many feelings of security.

Yahoo and Microsoft each announced significant cuts in the real world--1,520 for Yahoo and up to 5,000 for Microsoft--because of the economy. Combined with the inevitable redundancies from the merger, the job cuts probably would have come earlier for Microhoo and might well have been followed by more, increasing the total.

Worse, that unpleasantness would have taken place before any of the fruits of the integration were visible, deepening morale issues.

So by this time in our alternate history, there would be plenty of unpleasant news. Google wouldn't be put in its place, the benefits of the Microhoo merger wouldn't be apparent, and the world would look very similar to today's, minus a YHOO ticker symbol on Nasdaq. But the seeds of the merger's fruit would be planted, and if Microsoft played its cards right, Google would be reckoning with a more formidable competitor.