Microsoft-Yahoo Merger

Microsoft-Yahoo Merger

When Microsoft made its unsolicited $44 billion bid for Yahoo in February, a match looked distinctly possible. Like Beatrice and Benedict in Much Ado About Nothing, it seemed that the two were ready to put years of sniping and barbed flirting behind them and forge a powerful union. As a pair, they could have given the all-dominant Google a run for its money in online advertising, an industry which could be worth $80 billion by 2010. All didn't end well, however, and the marriage--at least for now--is off. After lengthy negotiations, Microsoft chief executive Steve Ballmer walked away earlier this month, declaring that Yahoo's asking price of $37 a share was just too high.

Ballmer's sudden change of heart might seem puzzling. When he launched the bid he made clear that he wasn't prepared to go home empty-handed. If Yahoo boss Jerry Yang wouldn't play ball, hinted Ballmer, then Microsoft would appeal direct to shareholders with a hostile bid. Somewhere along the line, however, the flame went dead. When Yahoo wouldn't budge on price, Ballmer began losing interest, reportedly asking Microsoft staffers, 'Hey, shall we just can this thing?' The news that Yahoo was in talks with Google about outsourcing some of its search business was the final straw; Ballmer detests Google, famously prefixing its name with all manner of expletives.

The truth is that personal animosities between Ballmer, Yang and Google chairman and chief executive Eric Schmidt have affected every stage of this failed merger. Like many of his Silicon Valley engineers, Yang is instilled with 'purple pride'--insider-speak for Yahoo's funky, consumer-led self-image. Conversely, he views Microsoft as a grey-suited crew stuck in the last century, a time when corporate software sales were the real way for tech firms to make money. For Yang, the deal with Microsoft was less about the interests of shareholders, who were overwhelmingly in favor of a merger, and more a battle for the soul of the firm he co-founded in 1995.

Ballmer never expected to be welcomed as a liberator, but he didn't expect palpable hostility from Yahoo staff. These tensions would have made it a very difficult merger to manage, especially if Microsoft were to achieve the $1 billion in savings it identified when it made its bid.

And aside from an almighty clash of cultures, there were other reasons Microsoft chose to walk away. Although anti-trust authorities signaled they would allow the two ...