Is Microsoft Saving Yahoo, or Is Yahoo the Savior?

Feb. 1, 2008— -- The tech world got another shakeup this morning when Microsoft announced that it was seeking to buy Yahoo for $44.6 billion.

The unsolicited bid, which represents a 62 percent premium on Yahoo's closing stock price yesterday, comes at a time when Yahoo has been struggling to find its way. Its stock price has been lagging, it has announced layoffs and Chairman and CEO Terry Semel was recently replaced by co-founder Jerry Yang.

Microsoft Chief Executive Steve Ballmer said in a conference call today that he'd personally called Yang last night to notify him of the bid. He also noted that last year Yahoo, under Semel's leadership, rejected a similar overture.

Today Yahoo said in a statement that it would "carefully and promptly" study Microsoft's bid.

So is this the case of a failing technology company, Yahoo, being saved by a larger tech company, Microsoft, because it failed to innovate? Probably not.

Technology analysts said that in addition to it being relatively cheap, consuming Yahoo could provide Microsoft with Web technologies that the desktop software behemoth has not been able to create on its own in its effort to keep pace with Google.

And while Yahoo has struggled, it is anything but dead. Google is now the dominant search engine -- even becoming a verb in the common lexicon -- but Yahoo still draws plenty of advertisers and some on Wall Street are happy with the direction Yang has taken the company in.

And Yahoo is a lot more than a search engine. It offers community groups, sports fantasy leagues and strong financial market data. Plus, Yahoo has millions of registered users.

Technology companies rise and fall according to their ability to innovate quickly. Think about Netscape. It's Internet browsers once dominated the market, but the company faltered when many Netscape features were adopted by competitors. Netscape is now part of AOL.

While it might take a carmaker half a decade to dramatically overhaul its line, a tech company can change the competitive landscape in months with one blockbuster product.

"Technology change is much more rapid than in most other industries," said Sid Parakh, an analyst with McAdams Wright Ragen. "You can be outdone by your competitor pretty quickly even if you are the industry leader."

Double the Innovation?

Parakh said Microsoft would benefit from assuming Yahoo's Web functions, and Yahoo's cheap stock price is driving the potential acquisition.

Microsoft executives spoke this morning about the potential added innovation of having the two research and development teams working together. Of course, whether the two teams would be more productive overall remains to be seen, but as the teams try to combine Web applications and desktop applications it could prove beneficial to have both parties in the same room.

On this morning's conference call, Ballmer and other Microsoft executives focused on the possibility of combining the company's larger data centers and servers with Yahoo's, which could speed up all the Web applications currently used separately by the two companies.

"A millisecond of lag time when you're trying to get to your application or get your search results is going to be the difference between using one search product over another," said Dawn Simon Talbot, managing director of equity research for One-on-One Research.

Talbot said that the future of software and the Web is a further integration.

So for instance, a company using a Microsoft spreadsheet program to analyze its sales data might be able to easily import industry sales figures through the Web. Other functionalities might be further folded in to existing programs. So instant messaging might no longer be an add-on program but something built into your other software. And all the software might be Web-based instead of desktop-based.

Google is already trying to encroach on Microsoft's dominance in the software field. The company has its own word processing and spreadsheet applications. Chat is also built into its popular Web-based e-mail program, Gmail.

Brian Bolan, an analyst with Jackson Securities, said the deal is all about social networking sites.

Microsoft owns 1.6 percent of Facebook, a deal Bolan sees as key.

"This bid underscores the importance of the Facebook investment for Microsoft," he wrote in a note to investors." Acquiring the rights to sell ads on that property brought in a wealth of knowledge and is a key underpinning in this deal. Without that investment, there would be little chance of this bid succeeding."