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Apr 10 2008 11:34PM EDT

Perhaps Microsoft Needs Yahoo More Than It Lets On

There is one truth about mega-mergers: They are almost never done by a company in a position of strength. So what does that say about Microsoft's attempt to buy Yahoo?

Maybe that Microsoft's core operating system is in more trouble than most people realize. At least that's the conclusion of Gartner Group analysts. They made a devastating presentation on why Windows is messed up.

With that hovering around Microsoft, the company is trying to buy Yahoo, forcing an apparent Yahoo board meeting today to discuss the merger -- and other options that so far seem more smoke than fire.

Great, fast-growing companies certainly make acquisitions, but they generally buy smaller companies that get absorbed into the bigger entity and add a key business or technology. Think about IBM, Wal-mart, General Electric, Toyota -- even Google, Cisco, Apple and, until recently, Microsoft. They've bought companies, but not companies big enough to disrupt their corporate cultures.

Almost anytime you see a mega-merger in exactly the same industry, it's because that industry has become so mature and is so starved for growth, the only way to go forward is to buy a competitor. Think AT&T buying BellSouth (both sitting on declining traditional telephone infrastructure), or Delta buying Northwest.

If you see a mega-merger that reaches for a different kind of business, it's typically because the aggressor company sees trouble in its core business and wants a new direction for growth. That would be -- even though it didn't seem that way at the time -- AOL buying Time Warner. It would be Sony buying Columbia Pictures in 1989.

Few mega-mergers really work out well. In technology, even fewer seem to be anything but busts.

So whatever you think of a Microsoft-Yahoo combination, the odds it will be a long-term winner look pretty slim.

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