Microsoft + Yahoo = Microhoo?

Microsoft has offered to buy Yahoo for $44.6 billion, a 62% premium over Yahoo's Thursday stock price. Microsoft has $20 billion or so in cash and, in 2007, brought in $17 billion in net income. This is a huge offer from a position of strength. It's reminiscent of IBM's 1995 takeover of Lotus Development. Yahoo won't have much luck resisting, and it's doubtful any other company could muster the money to outmaneuver Microsoft.

(In a little historical twist, top Microsoft exec Ray Ozzie was at Lotus when IBM bought the company. In fact, Ozzie was one of the main reasons IBM bought the company.)

Certainly Microsoft is doing this to battle Google, which has become a legitimate threat not just to Microsoft's non-core Internet businesses like MSN, but to its very core business of applications software such as Word, Exchange and Excel.

Microsoft + Yahoo equals...what? Well, Yahoo hasn't done so well the past couple of years, and Microsoft management and cash might help. Microsoft sure could use Yahoo's know-how in Internet services like mail and calendars and instant messaging -- none of which Microsoft has been able to dominate. One of the big things Microsoft gets in the deal is sheer infrastructure -- huge data centers that can serve Internet content and apps. That kind of stuff is underappreciated, but Google, Yahoo and Microsoft have been in a data center arms race. In that sense, Microsoft and Yahoo joining forces is like the U.S. and Russia becoming allies against Germany in WWII.

But caution is in order. Tech mega-mergers have rarely worked well. (H-P + Compaq? Nope. Compaq + Digital Equipment? Nope. AOL + Time Warner? Ummm...nope.) Yahoo is a unique culture. It flows out of the personalities of its founders, Jerry Yang (now CEO) and David Filo. Insiders had felt that ousted CEO Terry Semel had taken Yahoo too far from its roots, and were just getting enthusiastic about Yang's leadership and a return to its core culture. Now Microsoft comes along, and that can't be a positive for the culture. Hard to imagine Yang and Filo and other long-time Yahooians -- who've long made their fortunes -- sticking around after a Microsoft buyout.

All in all, this one's going to be interesting.

Credit: Ethan Miller/Getty Images

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