In addition to just being an all around loser idea in general, a hostile takeover of Yahoo at $44.6 billion or more would take all the cash Microsoft currently has and then some. The company reported around $21 billion in cash and short term assets at the end of 2007.
Microsoft has been frittering away its cash stockpile by paying dividends to shareholders and buying back its own stock. Dividends and stock buyback are what a company does when it decides that its investors can do more with its money that the company can itself.
Microsoft has been betting against its own future, essentially giving away its cash position because it saw nothing it could effectively do with it. If it were able to turn that cash around to buy strategic products or companies to expand its position, or to invest in building out new growth of its own, it would hold on to its savings just as Apple has been.
Apple is dramatically expanding its campus, expanding its online services business, expanding its iPods into a WiFi mobile platform, expanding the iPhone into a worldwide smartphone development platform, expanding its Macintosh market into new directions, expanding its retail operations, and expanding its online media sales. It also wants to be ready to acquire the next application team or innovative company it has the opportunity to buy. Apple is therefore sitting on its cash, not giving it back to investors.
Microsoft is currently generating a lot of cash from its desktop, server, and office businesses. It wouldn’t have any trouble going deep in debt to buy Yahoo and then quickly repaying its loans from its rich income. However, what would that accomplish? The company would be burning up its cash pile and marking all of its future profits for the same flames, all to acquire a company that’s a bad match and which would almost certainly result in a huge employee, customer, and partnership defection. All that money burnt for the shell of Yahoo’s struggling operations.
It would take at least five years for Microsoft to merge Yahoo into its own holdings. Yahoo has only recently finished integrating Overture into its own operations, despite having purchased the company way back in 2003. While Yahoo and Overture were a sensible match with less overlap, a similar vision, and complementary products, that merger was fraught with crisis and problems and management politics. Is Microsoft going to gobble down Yahoo any faster without the same kind of heartburn?
Five years from now, Microsoft’s monopolies will likely be in far worse shape than they already are. Over the last half decade, Microsoft lost its desktop reputation to Mac OS X and saw its Enterprise role slip precariously as the rest of the industry has aligned behind Linux-oriented strategies. In concert with those changes, the credible threats to Office have emerged in the Enterprise with OpenOffice, now sold by IBM under the Lotus Symphony brand, and Apple’s iWork among consumers.
Microsoft doesn’t even have to lose many sales to rapidly feel the heat of increased competition; once its monopoly position begins to melt, there will be a massive rejiggering of where software profits flow and in what quantities.
Microsoft’s billions in revenue are based on its ability to sell Office licenses to consumers for $500 and license Exchange and Server products for $15,000 a pop to small workgroups. Competing against $79 consumer packages and IBM’s free productivity software tied to Lotus Notes and its Linux services, Microsoft simply won’t be able to extort that kind of cash anymore, even if it can continue to sell the majority of the software pie in terms of units. The company has already been forced to dramatically re-price Office for Mac and offer far more generous licensing terms, just because of the arrival of iWork.
That strongly suggests that in 2012, Microsoft will be bringing in much less revenue and slimmer profits, just as it would be finishing up its Yahoo online services merger and selling Windows Seven and Office 15 against free alternatives on the PC and better integrated products from Apple.
There’s also no reason for believing that a bigger MSN could effectively compete against Google’s offerings in the online space, or even that MSN would be bigger at all after suffering through a painful transition that involved mass defections of Yahoo’s former employees, customers, and partners.
