Readers responses and some more thoughts on the proxy smackdown between Yahoo and Icahn

My front-page column in the Mercury News on the Yahoo proxy fight with Carl Icahn drew some strong responses from readers. I’ll stand by my prediction that Icahn would win a shareholder vote on Aug. 1, but there are some things I want to clarify about my feelings and perspective on this mess.

First, let’s go the readers’ comments.

Raymond DeMattei wrote:

“I really get tired of so called experts cheering on the Microsoft takeover of Yahoo. Isn’t the legalized monopoly that is Microsoft big enough.”

Irv Halland of Saratoga wrote:

“Glad you have it all figured out, Chris. But, I see things somewhat differently. Yahoo is an American original and I hate to see it gobbled up by the Dark Side. Bill Gates built Microsoft to its current position of software prominence and wealth, by parlaying his sheer luck and obvious smarts at being in the right biz at the right time when IBM came calling. And then, inventing a business model that sold and resold the same basic software over and over to the same unhappy customers year after year. The cash has piled up over the years. His wife seems to have made a mensch out of him at this late date.

King Carl (Icahn), on the other hand, has successfully raided company after company. His M.O. is to buy low, engineer a stock runup and sell at a profit. No real value added there. It’s hard to get enthoused about that bisiness model.

Yahoo has, on the other hand, provided a host of services and innovations over the years. I use them daily as do millions of others. They are doing some good. It’s not just about the almighty dollar with them.

I don’t believe they deserve their likely fate: getting swallowed up by Microsoft and Icahn. It’s a really American Tragedy in my book. You see, Chris, it’s not just about money.”

That last point is a good transition into my thoughts that came out of some of these e-mails.

First, it is about the money. For better or worse, it’s a shareholders world, and we just live in it. And by shareholders, generally we’re talking about people who manage large funds that are mainly driven by their returns. So when someone offers them a quick buck, they’re just as likely to snap it up and not spend too much time agonizing over the implications for the employees or the community.

Beyond that, though, I also had the distinct impression that many readers felt I was being a cheerleader for this deal. So let me clarify that point: I’m not. This deal won’t work. It’s already hurting Yahoo (probably) and it will be a disaster for Microsoft.

In fact, that’s one of the odd features of this deal. Everyone keeps saying Microsoft needs it and Yahoo needs it. Yet no one actually thinks this is going to help Microsoft compete with Google. No one is out there saying that once such a deal is done (whether it’s an outright sale or just a partial acquisition of Yahoo’s search assets) then Microsoft is really going to give Google a run for its money. Strange, huh?

But such thinking is all too typical. For all the talk of innovation in Silicon Valley (or in Redmond and Seattle in this case), for all the MBAs running around all the executives suites, corporate strategy can often be simple minded. When a company hits the skids, or even a bump like Microsoft, it seems there are only two strategies most executives use: Fire a bunch of folks, or buy another company.

Despite repeated attempts at the latter, for many years, it was conventional wisdom that tech mergers tend to be unsuccessful. More recently, though, Oracle has challenged that notion by gobbling up just about every competitor over the past four years. Oracle’s revenues have boomed, even if it hasn’t gotten much love from Wall Street. In fact, those acquisitions have been part of a bigger explosion in tech M&A over the past few years.

And of course there’s the HP-Compaq deal which appears to be succeeding under CEO Mark Hurd.

So are mergers a good thing after all?

Not so fast. Turns out that despite this frenzy of buying and selling, the CW may have been right after all. According to a report from Accenture released a couple of weeks ago. The less-than-sexy title of the report is “Leveraging Sales & Marketing to Maximize the Value of Mergers & Acquisitions.”

According to the report:

“While the acquirer’s top-line traditionally benefits from revenue growth in the first year after an acquisition, few companies have been able to achieve sustained increases in revenue growth in the subsequent years post-close. In fact, only half of the senior executives polled in a 2006 Accenture/Economist Intelligence Unit survey believed that their companies had achieved the revenue synergies they had expected from their M&A activities.

In addition, in a recent study of 80 global deals completed during 2002 through 2005, around 58 percent of acquirers were unable to generate increased revenue growth in the second fiscal year after the deal closed compared with what their growth had been two years before the deal. Furthermore, revenue growth for these companies was nearly 600 basis points lower post-close than pre-close.”

In other words, most of these deals fail to pay the dividends promised by over eager executives. What goes wrong? According to Accenture, the deals sputter because:

  • Executives underestimate the complexity of integration.
  • That integration becomes too much of a distraction for too long.
  • There’s a greater risk that key employees will leave.

Accenture isn’t necessarily arguing to kill your M&A. But it is trying to promote a better awareness of the challenges.

That said, I think many of these points will apply to Microsoft. It will take a long time to get this deal approved. Integration is going to be a nightmare, especially if it comes on the heels of a vicious proxy fight. And that’s going to cause a lot of employees at Yahoo to jump ship. Yes, Microsoft has been pursuing a kinder, gentler acquisition strategy in recent years when it comes to Silicon Valley companies.

But this deal will unravel some of that goodwill and leave the Redmond giant hobbled rather than re-invigorated when it comes to competing with Google.

The real secret to beating Google? The answer is as obvious as it is difficult to do: Innovate.

 

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  • Irv Halland

    Thanks for the clarificataion of your position on the MSFT/YHOO deal or no deal. I did get the wrong impression from your front page article. I’ll now go back to sleep.
    For years I have been listening to Bill Gates and now Steve Ballmer running their mouths about how they love to innovate whilst they gobbled up all the smaller companies they were doing the real innovation. I realized of course that it was all BS because what they did spoke far louder than their words about what they really believe in.
    This deal is no different. They are the General Motors of the software world and have tremendous power to buy up and chew up the competition. Examples abound.
    But what goes around comes around. Even the Rockefellers and Carnegies were cut down to size. Technical advances and changes in political fortunes take care of this. Sooner rather than later, depending on which politicians are in charge, competition will be restored.
    Best regards,
    Irv Halland
    Saratoga

 
 
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