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Sure, the software giant has plenty of cash, but that might not be enough to make a deal between the two companies worthwhile—and workable
You'd be hard-pressed to find many things to which Peter Drucker was as openly hostile as the hostile takeover.
In his book The New Realities, he went so far as to call the gobbling up of companies in this fashion "the most serious assault on management in its history—a far more serious assault than any mounted by Marxists."
Mind you, he made these comments in 1989, when all too many real-life Gordon Gekkos were commanding center stage. What rankled Drucker was the tendency of these corporate raiders to quickly dismantle the enterprises they'd just gotten their hands on, as if they were stolen cars, "sacrificing long-range, wealth-producing capacity to short-term gains."
Of course, the unsolicited takeover proposal dominating the news these days—Microsoft's $44.6 billion bid for Yahoo!—doesn't fit this mold. Microsoft (MSFT) hopes to strengthen Yahoo's (YHOO) core assets, not strip them.
Still, that doesn't mean Drucker wouldn't have viewed Microsoft's attempt as fundamentally flawed. The reason: I suspect he would have questioned whether the software giant actually brings enough to the party.
What may happen next is unclear. Yahoo, having spurned Microsoft's overture, is reportedly in talks (BusinessWeek.com, 2/14/08) with News Corp. (NWS) about some alternative alliance. Microsoft, meanwhile, seems to have two choices: raise its offer in the hopes that Yahoo will yield, or launch a proxy fight and take its case straight to shareholders.
Cash: Not Enough
But what is its case, exactly? Contrary to the way many people tend to look at such propositions, Drucker believed it's incumbent on the purchaser—not the entity being purchased—to add value. In his Jan. 31 letter to the Yahoo board, Microsoft Chief Executive Steve Ballmer focused primarily on one advantage that a combination of the two companies' Internet operations would create: "scale." In fact, he used the word no fewer than five times in his missive.
There's sound logic behind that. No one doubts it's going to take considerable heft at this stage to even try to challenge Google (GOOG), the undisputed industry leader. As Ballmer noted, this means possessing a sufficiently large online advertising platform, as well as having the "expanded R&D capacity" to drive innovation.
The issue is: What specific pluses, besides sheer size, would result from a Microsoft-Yahoo marriage? By definition, the union of any two big companies will help achieve scale; that's simply a function of arithmetic. What Drucker suggested is if a takeover is going to work in the long run, it needs to be predicated on much more than that.
"An acquisition will succeed," he wrote in The Frontiers of Management, "only if the acquiring company thinks through what it can contribute to the business it is buying, not what the acquired company will contribute to the acquirer, no matter how attractive the expected 'synergy' may look.
"What the acquiring company contributes may vary," Drucker added. "It may be management, technology, or strength in distribution." The one thing it can't be, according to Drucker, is the one thing that Microsoft has lots of: dough. "Money alone," he said, "is never enough."
A collection of case studies, written by Drucker and updated by my Claremont Graduate University colleague Joe Maciariello, cites the 1998 merger of Citibank (C) and Travelers—a transaction initiated by Sandy Weill, then chairman of Travelers—as an example of how to do this right. At the time, Citibank enjoyed a strong presence around the globe. Travelers, for its part, boasted a terrific portfolio of financial products and services.
"What Travelers saw itself as being able to contribute," Drucker and Maciariello explained, "was to greatly increase the volume of business the superb Citibank worldwide distribution system…could sell, and at little or no cost."
So what would Microsoft provide if it were ultimately able to snap up Yahoo? Some analysts say plenty. Imran Khan of JPMorgan Securities (JPM) has pointed, for instance, to Microsoft's international reach. "If you look at Yahoo," he says, "it is very strong in the United States, but they're not very strong outside the U.S., whereas Microsoft has a…stronger position in the European market."
Notably, however, most observers have zeroed in on the benefits that Yahoo would deliver to Microsoft—not the other way around. Among them: a share of online advertising revenue that's more than double that of Microsoft's MSN; advances Yahoo has made in online advertising auction theory and data-mining; and, as Jeffrey Rayport of the consulting firm Marketspace has put it, "features with the kind of sex appeal Microsoft itself could never achieve."
No Simple Execution
Takeovers, even friendly ones, are rarely easy to execute. Top talent often flees, if it isn't fired first. Cultures can clash, resulting in an ugly Us vs. Them dynamic. "Sometimes," wrote Drucker, "it takes a whole generation before these invisible but impenetrable barriers come down."
If Microsoft does wind up swallowing Yahoo, it may well have to sort out many such problems. But first, there is a more basic question for the boards and shareholders of both companies to ask themselves: What does Microsoft really offer Yahoo beyond a bucketful of cash? If there's no good answer, count this as a deal Drucker would have discouraged.