Microsoft's Strategy with Yahoo

The Sunday New York Times had an interesting article on Microsoft's acquisition of Yahoo. In part I found the article interesting because it followed the same logic that I outlined in Microsoft Yahoo Makes Little Sense. The NYT basically said that Microsoft would be better off acquiring an enterprise software company like SAP rather than Yahoo. According to the NYT, approximately 50 percent of Microsoft revenue comes from business customers. Therefore, if a company was going to make acquisitions, they should be in their core business. I faulted Microsoft, in part, because Yahoo's online advertising was not part of the core Microsoft business and required different core competencies to succeed.

The article got me thinking about the benefit to shareholders from acquisitions in the core business. The NYT article had cited Oracle as one example of an acquisitive company that focused on its core competency. Oracle made 37 acquisitions in the period 2005-7. I also looked at Cisco, the network equipment manufacturer, who made 29 acquisitions in the period 2000-2. Basically Cisco acquires new products to compliment its product line through acquisitions. I then considered Intel as a non-software computer-related technology company to compare to Cisco. Interestingly, Intel appears not to have made any significant acquisitions since 2000. I also included Microsoft, whose acquisitions are all over the map. With the exception of Great Plains and Solomon (SME accounting packages), Microsoft  has rarely acquired in the business/enterprise software area.

The return on the stocks (excluding dividends) for the period 2003-7 is shown below. (A pretty Yahoo Finance chart is here.)

Recognizing that the sample is limited, focused acquisition strategies (Cisco and Oracle) where the company is acquired for its product (not the business) generated better returns in the period than Microsoft's wide ranging acquisition strategy. Intel, with its laser focus on its core business, also outperformed Microsoft. The fact that the NASDAQ index outperformed all four companies probably shows that young, fast growing companies generate better returns than the mature company examples I chose. Of course, on a risk adjusted basis Cisco and Oracle look pretty good.

Comments

[Kendall]

Once again Robert you make an excellent argument, backing it up with scientific evidence to support your claims. I too read the articla in the NYT about the Microsoft/Yahoo merger, and it was quite a stark contrast with a post in Fortune from February 22, which can be found here: http://money.cnn.com/2008/02/22/technology/kirkpatrick_microsoft.fortune/index.htm?postversion=2008022216.

Back when Microsoft built .NET, it was well under wraps and they did a good job schooling JAVA. If they have some sort of internet killer app that can be used in the Yahoo properties, that could be interesting. However, whether the Yahoo acquisition is strategic or not, the integration risks are huge.