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Brier Dudley offers a critical look at technology and business issues affecting the Northwest.

July 29, 2009 at 2:00 PM

Microsoft-Yahoo deal: Ballmer’s triumph

Think what you will about Steve Ballmer, but the Microsoft chief executive’s deal with Yahoo was masterly.

The guy could sell space heaters in a heat wave. Try turning him down, and he won’t give up until you’ve bought a truckload.

Yahoo rejected his shotgun marriage proposal a year ago, a tabloid breakup that turned out to be Ballmer’s lucky break.

Now he’s got a friend with benefits in Sunnyvale.

“Dating is one thing, having a partnership is another,” Yahoo Chief Executive Carol Bartz said this morning. “We wanted to make sure we’re truly committed.”

Through a yearlong courtship that came during Yahoo’s latest midlife crisis, Ballmer convinced Bartz that his cash wasn’t as important as other things he could offer, like engineering smarts.

For her part, Bartz overcame family prejudice against a foreign partner offering prosperity, dignity and a chance to restore the crumbling estate.

Seriously, the deal looks brilliant when you step back and look at what it could have been, how it was orchestrated and where Microsoft ended up.

Microsoft has made bigger deals and found ways to hold hands with bigger and more bitter rivals over the years.

Clever deals have been key to the company’s success from the start. When it comes to complicated contracts, Ballmer, Bill Gates and their lawyers are almost impossible to outmaneuver.

But the Yahoo alliance was pivotal. It’s Microsoft’s best and perhaps last chance to be a contender in the search business and keep Google from chipping away Microsoft’s its relevance.

Without Yahoo, and no longer able to leverage its desktop monopoly, Microsoft was unlikely to ever get a critical mass of consumer and advertisers to use its gateway to the Web.

Ballmer got all that for pocket change – maybe $200 million. He probably spent more on bankers and lawyers when he was offering to buy Yahoo outright for $45 billion.

In announcing the deal today, Ballmer told analysts Microsoft expects transition costs of “a couple of hundreds of millions” over the next two years. That’s less than a month of sales in Microsoft’s online business today, before Yahoo. It will barely nudge the $27 billion in operating expenses Microsoft’s planning over the next year.

But it’s not just a bargain. Here are a few of the ways Ballmer scored:

Talent. Ever since the Yahoo merger talks began, Microsoft steadily hired away top Yahoo talent, including the head of its search group in December. Now, Yahoo will hand the rest of its core search team over to Microsoft.

Ballmer gets pretty much all the engineering talent he wanted, without the hassle and cost of merging the entire company.

Yahoo will keep some search developers, to work on different projects, and lay off others.

Yahoo will also employ sales teams selling premium ads for the partnership, while Microsoft will run the automated “self-service” system that advertisers use to buy search ads directly.

Bing. Note the orchestration. As Yahoo negotiations entered the home stretch this summer, Microsoft launched Bing with a big marketing blitz. Instead of just saying its search engine would get better, Microsoft proved it at the crucial time. Bing’s launch buzz wasn’t going to last forever; now the Yahoo deal may sustain the momentum.

Longer term, Bing now is going to be all over the Web.

Yahoo lags Google on paid search, but its sites are still among the most-visited properties on the Web. Last month they Yahoo sites drew 154 million visitors, to Google’s 157 million, according to comScore surveys. Yahoo’s branding will still dominate its pages, but Bing will be there.

Revenue: It looks like a wash for Microsoft, which is giving Yahoo 88 percent of search ad revenue for the first five years.

But Yahoo may finally give Microsoft enough critical mass to win a significant share of the $25 billion online ad market.

Wall Street. A two-pointer for Microsoft, which apparently convinced analysts the deal won’t cost much or get in the way of the Windows-Office-Server money train coming over the next year.

Yahoo investors were left pining for the merger. It turns out they’re holding shares in a maturing company and not winning scratch tickets.

Antitrust. A three-pointer, as long as regulators focus on Google’s overwhelming dominance of the paid search market and not the overall online presence of Microsoft and Yahoo.

If Google fights the deal

in Washington, D.C., and Brussels, it will look like a bully asking the principal for protection.

Legacy. This is where Ballmer was luckiest of all.

He offered $47.5 billion for a struggling Internet company on the eve of the worst economic crisis since the Depression.

If that deal went through, his place in history might have been alongside the Web-obsessed Time Warner bosses who offered $182 billion for AOL in early 2000, just before the dot-com crash.

As if on cue, Time Warner on Monday filed plans to finally unwind the deal and spin off AOL.

Apparently Ballmer’s not interested.

Comments | Topics: aol, Microsoft, steve ballmer


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