Synergies and Economies of Scale

By Peter Galli  |  Posted 2008-02-01 Print this article Print

The deal has a number of synergies for both companies, Ballmer said, especially with regard to economies of scale. The deal would, he said, strengthen the value proposition to both advertisers and publishers and allow the two firms to consolidate capital spending.

It would also combine their engineering resources to focus on research and development priorities such as a single search index and single advertising platform. "Together we can unleash new levels of innovation, delivering enhanced user experiences, breakthroughs in search and new advertising platform capabilities," he said.

For its part, Yahoo said in a statement that its board would evaluate the proposal carefully and promptly, in the context of Yahoo's strategic plans, and pursue the best course of action to maximize long-term value for shareholders.

But, in an interesting turn of events, former CEO Terry Semel, who was replaced as CEO by Yahoo founder Jerry Yang last June, and who has said publicly he did not support a merger with Microsoft, stepped down as non-executive chairman Jan. 31.

Good for Google?

Some commentators do not believe the deal will actually impact Google in a negative way. Citi Investment Research analyst Mark Mahaney 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."

While Yahoo was an obvious strategic choice for Microsoft or any other company seeking to gain scale in Internet advertising, given its position as one of the top three Web properties worldwide, "Yahoo's increasing challenge over the past few years has been losing market share to Google in search and market share to social networks and other Web sites in display advertising," Mahaney said.

The value that Microsoft's offer placed on Yahoo "would seem to support Google's current share price," he noted, adding that a Microsoft-Yahoo combination could pose a greater competitive risk to Google in the long-term.

But, in the short-term, things did not look that rosy, he said, noting that "in the near-term we'd be skeptical that search users' overwhelming preference for Google would change. And our bias is that advertisers and search marketers would only shift their marketing spend if they believed the combination was generating a more effective advertising solution - which could take a very long time to prove," Mahaney said.

Peter Galli has been a financial/technology reporter for 12 years at leading publications in South Africa, the UK and the US. He has been Investment Editor of South Africa's Business Day Newspaper, the sister publication of the Financial Times of London.

He was also Group Financial Communications Manager for First National Bank, the second largest banking group in South Africa before moving on to become Executive News Editor of Business Report, the largest daily financial newspaper in South Africa, owned by the global Independent Newspapers group.

He was responsible for a national reporting team of 20 based in four bureaus. He also edited and contributed to its weekly technology page, and launched a financial and technology radio service supplying daily news bulletins to the national broadcaster, the South African Broadcasting Corporation, which were then distributed to some 50 radio stations across the country.

He was then transferred to San Francisco as Business Report's U.S. Correspondent to cover Silicon Valley, trade and finance between the US, Europe and emerging markets like South Africa. After serving that role for more than two years, he joined eWeek as a Senior Editor, covering software platforms in August 2000.

He has comprehensively covered Microsoft and its Windows and .Net platforms, as well as the many legal challenges it has faced. He has also focused on Sun Microsystems and its Solaris operating environment, Java and Unix offerings. He covers developments in the open source community, particularly around the Linux kernel and the effects it will have on the enterprise.

He has written extensively about new products for the Linux and Unix platforms, the development of open standards and critically looked at the potential Linux has to offer an alternative operating system and platform to Windows, .Net and Unix-based solutions like Solaris.

His interviews with senior industry executives include Microsoft CEO Steve Ballmer, Linus Torvalds, the original developer of the Linux operating system, Sun CEO Scot McNealy, and Bill Zeitler, a senior vice president at IBM.

For numerous examples of his writing you can search under his name at the eWEEK Website at


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