An Open Letter to Steve Ballmer

I know you want to make your mark on Microsoft, but you should stop trying to be all things to all people. Take a tip on focus from that other Steve

by Arik Hesseldahl

Dear Steve,

Let's talk over this Yahoo! (YHOO) thing before you move ahead. It's a profoundly bad idea.

Now that Bill Gates has completely stepped away from day-to-day operations at Microsoft (MSFT), I can understand you wanting to make a big move, shake things up, put the big Ballmer imprint on things. But as bold strokes go, as you probably know, big mergers practically never work.

Look at some of the big deals in high-tech history, most of them colossal failures. Going back a few years, there was IBM (IBM) and Rolm in 1984, and then AT&T (T) and NCR (NCR) in 1991. More recently, there was 1999's clunker between Lucent and Ascend (which helps explain last year's takeover of Lucent by Alcatel (ALU), itself a dubious-looking deal). And then there was Compaq and Digital Equipment in 1998, followed by Compaq and Hewlett-Packard (HPQ) in 2002. (O.K., that last one worked out in the end, but not before costing Carly Fiorina her job. Steve, are you listening?) Oh, and let's not forget the $164 billion failed marriage between Time Warner (TWX) and AOL, which Time Warner is now looking to cut loose (BusinessWeek.com, 2/7/08).

Portents of Merger Misfortune

Nothing about Microsoft and Yahoo suggests to me that in combining them you'll be able to avoid any of the standard pitfalls that make big tech mergers fail: brain drain from departing employees, political turf wars amid clashing cultures, morale-depleting anxiety as the focus shifts from work to layoff jitters, customers eschewing uncertainty and going to less-distracted rivals like Google (GOOG).

Oh, I know—on paper the combination makes sense. Yahoo generated sales of about $7 billion last year. Combine that with Microsoft's online revenues, and you've got a $10 billion business. And Yahoo's profits, $660 million last year, almost offset Microsoft's online red ink. Add in the operational savings you'd expect from combining the businesses, and the Microhoo online operation could make $1 billion a year in profit down the road. But is it really worth blowing what's worth $41.5 billion in cash and stock now for uncertain profits a few years from now? The fact that investors have wiped $3 billion off the value of that offer in a week should tell you something.

After all, who knows what will happen to the Internet while you're busy splicing these companies together. Name one truly important Internet innovation that has come internally from either Microsoft or Yahoo. I can't either. All the best new stuff at Yahoo has come by way of acquisitions: Flickr, Oddpost, Zimbra, and Overture.

And Microsoft's Internet acquisitions? None of recent note come to mind except for the advertising outfit aQuantive—another catch-up play. And Microsoft has bungled the older ones I can remember. WebTV was a dud before you bought it. After buying Hotmail in 1998, your heavy-handed company ruined a blessedly simple e-mail service, saddling it with ads and "convenient" integrations with other MSN services. And as for your own innovations? Please. Smart Displays and SPOT watches certainly looked cool in the promotional videos at CES. Duds both.

You know what you need Steve? Focus.