Microsoft and Yahoo! Have Little to Lose in Tying the Knot

There are plenty of reasons why the rumored deal that would have Microsoft (MSFT) acquiring Yahoo! (YHOO) for $50 billion is not a good idea. In general, large tech deals rarely work. The history of failures is very long; Compaq-HP, AOL-Time Warner, Symantec-Veritas to name a few. Company cultures in Silicon Valley are typically very hard to mesh. Going from evil competitor to lifelong companion doesn’t happen overnight too easily. In fact, for AOL Time Warner it never worked. The two sides hated each other from the start and the result was, according to many, the biggest failed merger of all time.

Add to that Microsoft’s preference against big deals and an outright merger of the two companies seems pretty unlikely. Not to mention a price of $50 billion is outrageous and would be extremely dilutive. However, given where they both are right now, I can’t help but think that there would be nothing to lose. Sure, the odds are high that the deal would never bear the kind of fruit that the optimists would hope for. But that doesn’t mean it is a bad idea.

From Microsoft’s perspective, they are probably shocked that despite having a near monopoly on the computer desktop, they still have yet to become an integral part of the user’s online experience. Windows and Office represent nearly all their profit. An inability to smoothly integrate their desktop applications and online applications is a huge failure on their part. Instead, people are using Google (GOOG) and other software to manage their online activities and search for content they need. You can certainly argue that just adding Yahoo services won’t necessarily change that, but perhaps the two sides working together can be more successful at turning Internet Explorer users into money-making customers.

From the Yahoo angle, they are obviously trying hard to regain some of the market share they have lost to Google. Combining with Microsoft would give them more reach and added capability to try and regain their relevancy. The potential of a Microsoft-Yahoo! team is obviously overwhelming.

Given the history of failed tech mergers and difficulty integrating vastly competitive corporate cultures, there are certainly reasons to believe that Microsoft and Yahoo! together would be no more adept at boosting their online presence than the two firms were able to accomplish alone. That said, I have to think that they have very little to lose by giving it a try. The worst case scenario, in my mind, would be no progress. And who knows, just because something is difficult doesn’t mean it is impossible.

Talks of any kind are clearly in the early stages, so it’s way too early to speculate on a deal happening, despite the move in Yahoo stock today. At this point I’d put the odds of a deal at no better than 50/50 but if I were advising them, I would make sure they thought long and hard about it. If they just dismiss it as joining with the enemy, which appears to be how talks between the two sides have gone in the past, it could be a missed opportunity to eat into Google’s lead.

Full Disclosure: Long Google and short Yahoo! at the time of writing