Microsoft's Steve Ballmer is trying hard to make two mistakes

John Shinal · February 14, 2008 · Short URL:

Microsoft CEO Steve Ballmer is right now trying hard to make the Yahoo deal happen. He wants it bad. He wants Yahoo as part of Microsoft to help him solve the Google problem.

Google is still dominating the search ad market even after Microsoft has spent billions on internal product development. To want to buy Yahoo at a significant premium to what the public stock market thought it was worth suggests that Ballmer is convinced his Microsoft engineers will never be able to surpass Google in seach ad technology WITHOUT ACQUIRING YAHOO'S TECHNOLOGY.

But he's buying Google's weaker competitor to try and make himself stronger? He's getting caught up in the art of the deal, trying to swoop into Silicon Valley and acquire one of its marquee giants.

Microsoft has always been an outsider in Silicon Valley, by sheer fate of location, and because Bill Gates created a corporate culture that is distinct from the valley version, as practiced by Yahoo.  Integrating Yahoo and Microsoft will be very hard because of this culture clash, which will be sharpened the longer that Yahoo tries to fight off Ballmer's hostile bid.

How significant is it? Yahoo CEO Jerry Yang doesn't want to sell to Ballmer even though he is offering a huge premium -- and so far Yang's board is backing him up.

Now, the deal itself has taken on a life of its own. Big investors are weighing in on both sides: some Microsoft investors have stated publicly that they think Ballmer is overpaying for Yahoo, and massively diluting it's own shareholders' equity stake.

At the same time, veteran savvy investor Bill Miller of Legg Mason is buying up Yahoo shares, because he thinks they're worth more than what Ballmer is offering.

Translation: Ballmer is going to face a lot of resistance to pay more at the same time there is pressure on Yahoo to get more. And now Microsoft has a potential rival bidder in News Corp.

Ballmer may outlast them all and end up with Yahoo, but he's taking on massive risk on two fronts: the integration risk of buying a rival with a very-different culture, which is a weak No. 2 to Google in its most important market; and the risk that even if he can somehow integrate the two firms' without creating a huge brain-drain, if he pays too much he will never get back the equity value for his current shareholders.

Here's a strategy for playing this, for anyone with nothing better to do than trade stocks: buy Google and short Microsoft. At the same time, stay away from Yahoo, which has become a riskier play given the uncertainty of how much it's worth. 

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