Why Microsoft's Yahoo Bid Won't Work

By now, you may have read the news that Microsoft has extended an unsolicited takeover bid for Yahoo for about $44 billion or about $31 a share. Yahoo closed at $19 yesterday, making the premium upwards of 60% and putting the offer firmly into "can't refuse" territory.

The deal would be the largest acquisition in Microsoft's history, well overshadowing last year's $6 billion purchase of online ad service aQuantive.

From here at ground level, the deal makes some sense for Microsoft in that it is struggling to blunt rival Google's dominance in search and rapidly growing Google Tools community at the same time as Yahoo is also struggling to maintain relevance and market share. A Microsoft cash infusion could keep this a three-way race for some time (the deal somewhat reminds me of the Democratic race, with Hillary as Microsoft, Obama as Google and Edwards as Yahoo or, even better, McCain as Microsoft, Romney as Google and Huckabee as Yahoo. Then again I've probably been watching too much campaign coverage!)

My question is, though, what happens to the Yahoo brand? There is a widespread consumer perception of Microsoft culture as controlling to its very core, and I know (anecdotally at least) that one of the very things that users continue to like about Yahoo as a separate company is exactly that -- its independence from the other heavyweights in the email/search game.

It's worthwhile to note that unlike Google or Microsoft, Yahoo has been able to fully deliver the integrated consumer portal that offers an "all-in-one" internet experience (home page, email, search, shopping, news, finance etc.) Google is moving that way with iGoogle, and Microsoft has been trying for years with Hotmail and other MSN offerings, but neither has gotten its act together yet.

And try as I might, I just don't see much synergy. According to the latest numbers, the combination of Microsoft and Yahoo would have a 33% share of the U.S. search market. (The deal would also bump up their combined total share of the free email account market.) Microsoft would be able to eliminate some ad sales overlap, and will get a huge increase in cash flow and market share.

But in order to maintain that market share, they would have to be managed as separate and competitive products -- something that Microsoft has done before (look at its overcrowded ERP lineup, for instance) but that IMO wouldn't work so well in this case either.

And I've been getting emails from friends with Yahoo.com domains all morning complaining about the move and threatening to switch to Gmail, which begs the question how much, if any, the accountants are planning on writing down the Yahoo brand once it's in Microsoft's stable?