We think a straight acquisition of Yahoo (YHOO) by Microsoft (MSFT) would be a disaster. However, we also think the fundamental premise for the merger is sound and that the companies should combine forces. Furthermore, we think there’s a way to do this that would be a win for both companies’ shareholders. To wit:
1. Jerry, fly up to Redmond this afternoon and have dinner with Steve. Just the two of you. No bankers, no lawyers, no colleagues, no advisers.
2. Jerry and Steve: Agree on the following:
- Both of you are getting your butts kicked.
- Both of you have tried for years to change this situation and have failed to do so.
- Both of you need to do something radical.
- Combining forces is smart.
3. Jerry, persuade Steve that a straight acquisition of Yahoo by Microsoft would be a disaster for both companies. (Read this post if you’d like an outsider’s perspective on this). This will be a tough sell: Steve will want to kill himself before he admits that he won’t eventually be able to crush Google through money, power, energy, and relentless effort. He will not want to hear that acquiring Yahoo will be a disaster. He will offer extremely compelling explanations about how Microsoft understands the integration and retention challenges, the morale challenges, the focus challenges, the internal-conflict challenges. So it’s time for some relentless persuasion of your own. Don’t back down, Jerry. If you leave the dinner table without persuading Steve of this, your Yahoo baby (and Steve’s Internet business) will be toast.
4. Jerry, float a better idea–a way to combine forces that avoids all of the problems of a straight acquisition:
- Microsoft and Yahoo combine their Internet forces and assets in a stand-alone company called “Yahoo”
- Microsoft will trade its Internet division and $10-$15 billion in cash for 51% of the combined company’s stock (resulting in an overall valuation similar to Microsoft’s $45 billion offer). 50/50 would make sense, but Steve won’t agree unless he has control, and Steve holds more cards.
- Microsoft will control a majority of the board.
- The new board will immediately decide on the combined company’s management team, and that team will immediately take control of the company. Not in early 2009. Now.
- Steve will be chairman of both boards.
5. Jerry, persuade Steve that, for the following reasons, this is a far better idea than a straight acquisition:
- No deal purgatory
- Less dilution and risk for Microsoft shareholders
- Less of a tax hit for Yahoo shareholders.
- Stand-alone company will be free to do whatever is necessary to maximise the value of its own business, without having to worry about whether this hurts Microsoft’s core business.
- Stand-alone company can grant stock options and hire and retain top talent who don’t want to hitch their wagons to Windows and Office, be employees number 79,862 and 79,863, and work for Microsoft.
- Stand-alone company will avoid the bureaucratic nightmare of having to fight for resources from a senior team who are also worried about fate of Windows, Office, Xbox, etc.
- Stand-alone company won’t have to compete with IBM, Oracle, Software-as-a-service vendors, Sony, Apple, and Research in Motion in addition to Google.
- Stand-alone company will have a massive war chest and will be able to compete with Google for acquisitions.
- Microsoft will have control and the ability to buy the rest of the stock if it later determines that a fully consolidated Yahoo is preferable.
- Microsoft and Yahoo will be able to share technology and expertise in ways that benefit both companies (senior Microsoft management can facilitate this).
- Microsoft doesn’t need to do everything itself: Microsoft’s shareholders will benefit from the success of this combined entity (as will Yahoo’s), even if the entity ends up hurting Microsoft’s core business.
7. Jerry, bring Steve a copy of The Innovator’s Dilemma and ask him to read it before he goes to sleep. Suggest he focus on the chapter that describes how some companies have successfully resisted being disrupted (by creating stand-alone entities that are free to destroy the mothership).
8. Jerry and Steve: Shake hands and agree to hammer out such a deal.
9. Go to sleep, wake up, call the lawyers/advisors, and tell them to smooth out the details.
10. Announce the deal.
Will this guarantee success? No. The new Yahoo will still have to execute superbly. But this arrangement, unlike a straight acquisition, will “maximise potential value” for both companies’ shareholders.
NOW WATCH: Tech Insider videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.