12.2. THE BATTLE OF YAHOO!
The 2008 fight over Yahoo! turned the intense rivalry between the two companies into open warfare. It escalated into a battle of biblical proportions. It was a war for power and control in the digital world—the former David versus the former Goliath—Google against Microsoft.
As early as 2006, Yahoo!'s financial results began to weaken, largely due to competition from Google. Google was going after Yahoo!'s core businesses with its Gmail, Google Video, personals, and other features within Google Base.
Late that year, Microsoft and Yahoo! began discussions about hooking up, either in partnerships or by acquisition. Yahoo! sent Microsoft packing, saying the time wasn't right. The situation at Yahoo! continued to deteriorate, and in January 2008, Ballmer made a $44 billion, $31-per-share offer to acquire Yahoo!.
Yahoo! had many attributes that Microsoft found attractive, especially its search technology and its ownership of Overture. Yahoo! balked at Microsoft's offer, and in May, Microsoft upped the ante to $47.5 billion, or $33 per share. Again, Yahoo! Chairman Jerry Yang refused, saying that Yahoo! was worth at least $37 per share.
By now, shareholders, especially investor Carl Icahn, were upset with Yang. The battle for control of Yahoo! eventually prompted several pension funds to sue the Yahoo! board for rebuffing the Microsoft offer. Yang's actions also pitted billionaire investor Icahn against Bill Miller, Legg Mason chief investment officer and CEO. Icahn initially demanded that Yahoo! accept Microsoft's purchase offer, but eventually he made peace with Yang and, with two other representatives, joined the board of directors. Miller sided with Yahoo!, but left the door open for Microsoft to make another try.
In June, Google put a dog in the fight when it offered Yahoo! a search partnership to bolster its earnings. The deal was expected to yield Yahoo! $800 million in annual advertising revenues. "There's no question in our view that an independent Yahoo! is better," said Schmidt, adding that it "will provide more competition in search and other advertising markets, in particular in display advertising."[]
"Microsoft has a long history of having deals that look quite good and end up looking not so good when you read the fine print," Schmidt said.[]
The Financial Times of London didn't like the smell of Google's offer. The newspaper said the deal demonstrated Google at its worst, "a combination of naïve insouciance and thinly veiled scheming."
The insouciance was shown by Sergey Brin, who earlier this year blithely told a group of reporters (including this one) that the alliance was all about helping out old friends. After all, Yahoo's Jerry Yang and David Filo had lent the Google founders a hand when they were just starting out, and anyway, their companies' cultures were very similar.
The scheming was the obvious ulterior motive here, to block Microsoft. Asked about how they set corporate strategy, Google executives always deny they have such thoughts: Everything they do is for the benefit of the customers. But this partnership betrayed one of Google's most powerful psychoses, its paranoia about Microsoft.[]
Within months, it became clear that the U.S. Justice Department and Canadian regulators would not approve the Google–Yahoo! deal, since it gave the two companies 90 percent of the paid search market. Advertisers also were up in arms about the alliance, saying it would give Google and Yahoo! too much influence over pricing and other online advertising issues.
Google pulled out in early November. The company's chief legal officer David Drummond explained: "We're of course disappointed that this deal won't be moving ahead. But we're not going to let the prospect of a lengthy legal battle distract us from our core mission. That would be like trying to drive down the road of innovation with the parking brake on."[]
At the same time, the economy and the financial markets went into a slide. Yahoo!'s share price fell off a cliff. Yahoo! went back to Microsoft, hat in hand, but it was too late. CEO Steve Ballmer was no longer interested. "We made an offer, we made another offer, and it was clear that Yahoo! didn't want to sell the business to us and we moved on," Ballmer said. "We are not interested in going back and re-looking at an acquisition. I don't know why they would be either, frankly. They turned us down at $33 a share."[]
The skirmish ended with Google the clear victor. Microsoft was stopped from acquiring Yahoo! and building a fortress in the search business. Yahoo! was so shattered that by the end of the year, its share price had declined 48 percent. From a 52-week high of $30.25, Yahoo! ended the year at about $12 per share. From a company Microsoft was willing to buy for more than $47 billion, Yahoo! ended with market capitalization of $17.8 billion. Yahoo! announced it would lay off 10 percent of its workforce. Once the second leading search engine, Yahoo! no longer presented much of an opposition to Google.
While Google certainly has shaken Microsoft's confidence on the search and advertising fronts, Microsoft reigns supreme in other areas. A writer for Forbes asked this question: "Have you heard of any big companies that have ditched Microsoft Office and switched to the free Google Apps? Me neither.... Google has failed on that front because its apps simply aren't that compelling."[]
The war is not over, although most experts figure Google is in the lead. The prize is big, and it will be a fight worth watching. "Microsoft... continues to try to catch a runaway freight train with Google, and the reality is Microsoft's tried organically so many times and really has little to show for it," said Citigroup Global Markets Inc. software analyst Brent Thill.[]
"They [Google] are the company that is going to have more influence and more control over the structure of the world information industry than any other," said David B. Yoffie, a professor at the Harvard Business School. "The right way to think about Google is, they are the next Microsoft."[]