Microsoft`s Bid for Yahoo Faces Challenges

While Microsoft is hoping to buy Yahoo for $44.6 billion in stock or cash, the software maker has a long and difficult road ahead to not only make the deal a reality, but also make it work.

The deal, which was announced Feb. 1 and will be priced at a 62 percent premium on Yahoo's Jan. 31 share price if it closes, underscores Microsoft's determination to gain scale in the Internet advertising and development space and to more effectively compete with dominant rival Google.

While Microsoft CEO Steve Ballmer believes the synergies between the two companies are worth at least $1 billion a year, the merger also raises the question of how effectively the two will be able to continue operating during their integration, said Andrew Frank, research vice president at Gartner.

Given that the online advertising business requires significant levels of account service, "even the perception of a diversion could wind up delivering business to their competitors," Frank said.

That view is shared by Citi Investment Research analyst Mark Mahaney, who said in a research note Feb. 1 that "we could see a scenario by which Google would actually gain more market share due to industry uncertainty over the integration of the deal."

There is also the issue of antitrust scrutiny, both in the United States and abroad. "Antitrust laws are a concern with any deal of this size. While the current U.S. administration is less likely to pose a problem, in recent years the European Union has aggressively policed similar mergers," Gartner's Frank said.

While the deal would bring Microsoft better Web search and Webmail than it currently has, this would still be no better than Google's, and Microsoft would also be faced with a decision as to what to do with Zimbra.

Yahoo forked out $350 million last September to buy the company, which offers an AJAX client that bundles e-mail, contacts, shared calendar, search and VOIP (voice over IP).

 “Our guess is that Microsoft will let it wither and die, rather than spin it off and leave it as a threat to Exchange," The 451 Group analysts Nick Patience and Brenon Daly said.

But other analysts said they think Microsoft is looking at more than just challenging Google's dominance with this acquisition. Forrester analyst Charlene Li said Microsoft is interested in search because it provides a beachhead into those small and midsize businesses that do not have a direct relationship with Microsoft.

"That's the real threat that Google poses: its ability to leverage today's search relationship into Google Domains and eventually, software as a service, which could undermine Microsoft's long-term position. To that end, Microsoft is buying significant share with Yahoo not only from search users, but also search advertisers and other relationships via Yahoo Store," Li said.

Another Forrester analyst, Shar VanBoskirk, agreed, saying the combined Microsoft-Yahoo would likely accept second place to Google in the search business, but then focus all of its energy on trouncing them in the brand advertising space, with an emphasis on display ads and online video.

"Tomorrow's media companies are technology innovators who can connect audiences with marketing messages, not content creators," VanBoskirk said.

Coveo Solutions, an enterprise search company, was upbeat about the deal, with James Waters, a company vice president, saying the move indicates Microsoft has chosen to focus on public Web search and all that goes along with it, "including an intense rivalry with Google," which will divert its focus away from enterprise search.

"What is exciting to Coveo is the validation that companies continue to seek the value of platform-class solutions for access to knowledge without all the pitfalls of traditional deployments—time to market and total cost of ownership," Waters told eWEEK.