News February 6, 2008, 3:14PM EST

Will Yahoo! Feel the Love?

(page 2 of 2)

Steve Brodner

Dilemmas, Dilemmas

Looks great on paper. The reality, though, may be something else entirely. Start with efforts to meld or eliminate overlapping businesses. There are dozens of them, everything from news Web sites and Net portals to e-mail, instant messaging services, and online advertising technology. To achieve the projected cost savings, Microsoft will have to choose which businesses survive and which ones don't.

Ballmer says: "Yahoo, the brand, will live." But eventually he'll have to decide between Yahoo Mail and Microsoft's Hotmail, Yahoo Finance and MSN's finance site, and others. Inevitably, products will be jettisoned, managers will lose clout, and people will lose jobs. "They've really bitten off quite a bit," says Kevin Lee, executive chairman of Didit, a search marketing company that helps companies place ads on Google, Yahoo, and Microsoft Web sites.

One thorny call will concern Microsoft's adCenter and Yahoo's Project Panama, both technologies designed to help advertisers finely target online marketing. In a combined company, there's no reason for both to survive. And if you ask Tarek Najm, a distinguished engineer at Microsoft and adCenter's general manager, what Panama technology he'd like in his product, he's blunt. There isn't any. "We're the leaders in technology," Najm says. "Ours is better."

Layoffs Are Inevitable

Of course, getting to that $1 billion figure means cutting bodies, lots of them. "The cost structure of these companies is predominantly people," says Charles Di Bona, an analyst with Sanford C. Bernstein & Co. Who goes? It's impossible to know. But it won't just be lower-level staff. There's no reason to have two bosses for e-mail, instant messaging, and Web portals. Ballmer may have to chose between respected managers such as Brad Garlinghouse, the senior vice-president who runs those businesses at Yahoo, and Steve Berkowitz, the Microsoft senior vice-president with similar duties.

That sort of uncertainty can crush morale, something Yahoo has already been struggling with as its business has floundered. Some key employees have left in the past year, including sales boss Wenda Harris Millard, marketing chief Cammie Dunaway, and Yahoo Entertainment leader Vince Broady. Such defections are likely to mount if Microsoft takes over, even among the Yahoo engineers Microsoft badly needs to keep in order to compete with Google. "I just can't imagine most Yahoo employees wanting to stay on," says one former executive who left last year.

Much of Yahoo's appeal to employees has been its place in the Valley firmament as a Net icon. Being absorbed into Microsoft strips that away. "People at Yahoo have a little bit of that natural Silicon Valley hatred of Microsoft," says a former Yahoo vice-president who left last year. "Yahoo has always considered itself a bit of an upstart."

Microsoft may have little choice in bidding for Yahoo. If it wins, it'll have little room for error.

With Catherine Holahan, Robert D. Hof, and Steve Hamm

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