Can Microsoft Ingest Yahoo Without Getting Sick?

(courtesy of David Armano)

Microsoft's (MSFT) $44.6 billion offer to buy Yahoo (YHOO)isn't its first. Its made numerous overtures.  And back in November of 2007, I think Kevin Johnson a divisional VP at Microsoft, let their plans slip. He said that "Microsoft plans to grow its search share from 10% to 30%."  So there's only one way to do that and that's to Buy Yahoo.

Blodgett, Silicon Alley Insider

Buying Yahoo would give Microsoft 30% search share instantly. It would also boost Microsoft's ad share close to that 40% goal. We continue to think that a Microsoft acquisition of Yahoo would be disastrous for Yahoo (not to mention creating an annoying one-time tax hit for us long-term Yahoo shareholders). But what such an acquisition would do to Yahoo is irrelevant. If Microsoft comes in with a Murdoch-like offer, Yahoo won't be able to refuse.

So here's the rub, just what will happen to the Hoo in Yahoo?  Their corporate cultures are vastly different. Yahoo! is a 12-year-old dot com company, with a dot com culture. It was one of the first dot com residents in the Valley and was part of the Internet start-up boom of the 1990s. Their operatin model is more aligned with Google as an advertising/media company than an ongoing software concern. Microsoft is all about software, irregardless of what we hear coming out of Redmond. Its always been a digital immigrant when it comes to the Web.

It ain't gonna be like slapping 2 bank brands together, that's for sure. The engineering teams in both companies are large and there are very few similarities -- there’s going to be a lot of politics.  Also, those with the skills to build Internet businesses can do it on their own and make a hell of a good living at it!  How, by flipping it to Google, Microsoft or another firm. Why would these types of folks stay post acquisition? Buying companies won't fix that.

These cultural differences are in my view so vast that I think Microsoft will lose a lot of the acquired talent shortly after the acquisition.  And where will that talent head?  2 places in my mind - one is surely Google (GOOG), where they will have the pick of the litter to reinforce their already strong ranks and two, I think we will see an influx back into the Startups in the Valley, which is good from an innovation perspective.

But even if they were to resolve the cultural issues - maybe by completely leaving Yahoo as a separate operating entity (would MSFT really do that?).  But putting aside the HUGE cultural differences, even the technology hurdles are vast. Yahoo and MSN run on completely different platforms making technical integration a huge challenge. Can Microsoft replicate their 1980s -90's success against IBM  (IBM) and Apple (AAPL)as they battle Google?

As Forbes put it back in May of 2007:

But while Microsoft and Yahoo! have the same problem--Google--putting Microsoft in charge of the two company's Web efforts wouldn't have been enough to fix it. The same qualities that make the folks running Microsoft so formidable in software haven't helped online. Placing them in charge of Yahoo!'s prickly corporate culture isn't the answer. The least-bad option for Microsoft might be to give up and spin out its online assets to Yahoo!.

On the flip side, I hear  that Microsoft employees are pretty bored and bordering on complacent these days and things over at Yahoo are downright depressing. Maybe such a deal might actually get both engineering teams energized and ready to fight the fight against Google!  Now that would be a fight I'd pay to watch. Hell, I'd want to get into the middle of it!