Microsoft, Yahoo, and Enterprise Architecture

Microsoft offers to buy Yahoo for $44 billion—brilliant play or stupid move?

Some say it’s a brilliant move:

According to techcrunch.com, a combined Microsoft/Yahoo would be a technology behemoth and have $65 billion in revenue, $17.6 billion in profit, 90,000 employees, and 32.7% of the U.S. search market share.

Yahoo owns semi-valuable assets like Flickr, a photo sharing site and del.icio.us, a social bookmark site.

Others say it’s a stupid move:

  1. Microsoft/Yahoo would still seriously trail Google’s U.S. search market share of 58.4%!
  2. Other corporate acquirers, like Oracle, generally profess acquisitions only if it enables a clear #1 market position like it is with data warehouse management, business analytics, human capital management, customer relationship management, and contract lifecycle management.
  3. Fortune Magazine, 18 February, 2008, says “Microsoft is paying too dearly for Yahoo.” Fortune asks “What exactly is Microsoft buying here? Technology? Yahoo has been managing a declining asset since Google invented a better way to do search…Technologists? Talent has been fleeing Yahoo Central since Terry Semel got there…a let’s not even talk about the clash of cultures that such a merger will create.”
  4. Yahoo has made serious management missteps, such as backing out of a deal to buy Facebook in 2006 at a $1 billion bargain (Facebook was recently valued at $15 billion) and botching the acquisition of YouTube and losing out to Google.

Fortune concludes:

  1. “Microsoft is buying an empty bag.”
  2. Yahoo will be Microsoft’s AOL” (comparing a Microsoft/Yahoo acquisition to the failed AOL/Time Warner one).
  3. Microsoft should abandon the acquisition, unbundle itself from search, Xbox, and Zune, and instead focus on improving its core competency, the operating system.

From a User-centric Enterprise Architecture perspective, it’s an interesting dilemma: should companies (like Microsoft) diversify their products and services, similar to the way an individual is supposed to responsibly manage their financial investments through broad diversification in order to manage risk and earn a better overall long-run return. Or should companies do what they do best and focus on improving their core offering and be #1 in that field.

Historically, I understand that most mergers and acquisitions fail miserably (like AOL/Time Warner) and only a few really succeed (like HP/Compaq). Yet, companies must diversify in order to mitigate risk and to seek new avenues to grow. As the old saying goes, “don’t put all your eggs in one basket.” The key to successfully diversify is to architect a #1 market share strategy, like Oracle, acquire truly strategic assets like Compaq, and not overpay like with Yahoo and AOL.