OK – so I’m almost always picking the bearish side for investments, but this one seems pretty clear. It’s a case of a lousy company buying a lousy company.
First let me explain what the implicatons of that are, and secondly lets breifly look at why Microsoft and Yahoo will be a hard combination to execute.
Part of the Evergreen work (essentially In Search of Excellence with numbers) we conducted at McKinsey was a piece by Prof. Habir Singh, who studied M&A’s, alliances and JV’s for the companies covered in the Evergreen analysis.
There were 160 companies in the Evergreen work, with qualitative and quantitative data from 10 years collected, structured and analysed for all of them. We defined ‘winner’ and ‘loser’ companies using total return to shareholders versus peer companies, but really it didn’t matter what financial measure you used.
The results from Habir’s piece of work were simple – Great companies do more frequent, lower value and higher value creating deals. They are generally more active in M&A and JV’s than loser companies, and far more likely to buy companies worth 20% or less of their own value. Loser companies take on bigger targets, and are likely to have associated eating disorders.
Almost all of the winner’s deals were value creating, while loser company deals were almost always neutral or value destructive.
In summary – loser companies that tried to buy their way out of trouble by buying other loser companies still lost.
Mre recently Habir features in this article, which asks why do 50-80% of mergers fail. REflect on that number for a second. That’s right, most mergers fail.
According to Sikora, the kinds of problems companies face with mergers range from poor strategic moves, such as overpayment, to unanticipated events, such as a particular technology becoming obsolete. “…
…many analysts view clashing corporate cultures as one of the most significant obstacles to post-merger integration.
… Harbir Singh, who has done extensive research on mergers, says that the crucial distinguishing factor between success and failure in a merger is a sense of objectivity on the part of executives — a “realistic outlook” that needs to be maintained from the initial transaction through the entire integration process. The danger, it seems, is when executives “fall in love” with the idea of the acquisition, wanting it to work no matter what the cost.
So – back to Microsoft and Yahoo.
Microsoft used to be a great company – they attracted the best employees, made a bunch of millionaires, and were really the place to be.
In latter years the mojo has long gone, and the bureaucracy has kicked in. The disaster that is Vista summarises what happens when great people are poorly led and managed. Once forlorn Apple is now Microsoft’s nemesis, along with Google.
Meanwhile Yahoo is in trouble as well, and the same Google is causing a lot of the trouble.
By combining the two companies analysts have pointed out that the new share of the search market will be 30%. But that’s a declining 30%, and more importantly leaves unanswered a myriad of technology questions.
And therein lies the problem. There is considerable overlap between the internet aspects of Microsoft’s business and Yahoo. The logical thing to do in such a combination is to kill one version of each product – say Hotmail/Yahoo Mail – and keep the other.
Is this really adding value to customers, or is it just taking out a competitor to gain a larger market share and to reduce costs? (That’s not to mention the issues that YahSoft woud have with migration of accounts.)
The problem here is the post merger management to consolidate the two companies is going to be tremendously difficult. It’s difficult because there are few real synergies, and it is difficult because both are performing poorly right now.
So although recent weeks have been bad, I’m pretty happy being short Microsoft right now. If the deal goes through then I’ll beef up that short position becasue there are serious indigestion problems ahead.