Last week Microsoft offered to buy Yahoo at a big premium over Yahoo’s current stock price; and Google complained vehemently that Microsoft’s purchase of Yahoo would reduce competition. There’s been tons of commentary about this. Here’s mine.
The first question to ask is why Microsoft made such a high offer for Yahoo. One possibility is that Microsoft thinks the market had drastically undervalued Yahoo, making it a good investment even at a big markup. This seems unlikely.
A more plausible theory is that Microsoft thinks Yahoo is a lot more valuable when combined with Microsoft than it would be on its own. Why might this be? There are two plausible theories.
The synergy theory says that combining Yahoo’s businesses with Microsoft’s businesses creates lots of extra value, that is that the whole is much more profitable than the parts would be separately.
The market structure theory says that Microsoft benefits from Yahoo’s presence in the market (as a counterweight to Google), that Microsoft worried that Yahoo’s market position was starting to slip, so Microsoft acted to prop up Yahoo by giving Yahoo credible access to capital and strong management. In this theory, Microsoft cares less (or not at all) about actually combining the businesses, and wants mostly to keep Google from capturing Yahoo’s market share.
My guess is that both theories have some merit – that Microsoft’s offer is both offensive (seeking synergies) and defensive (maintaining market structure).
Google objected almost immediately that a Microsoft-Yahoo merger would reduce competition to the extent that government should intervene to block the merger or restrict the conduct of the merged entity. The commentary on Google’s complaint has focused on two points. First, at least in some markets, two-way competition between Microhoo and Google might be more vigorous than the current three-way competition between a dominant Google and two rivals. Second, even assuming that the antitrust authorities ultimately reject Google’s argument and allow the merger to proceed, government scrutiny will delay the merger and distract Microsoft and Yahoo, thereby helping Google.
Complaining has downsides for Google too – a government skeptical of acquisitions by dominant high-tech companies could easily boomerang and cause Google its own antitrust headaches down the road.
So why is Google complaining, despite this risk? The most intriguing possibility is that Google is working the refs. Athletes and coaches often complain to the referee about a call, knowing that the ref won’t change the call, but hoping to generate some sympathy that will pay off next time a close call has to be made. Suppose Google complains, and the government rejects its complaint. Next time Google makes an acquisition and the government comes starts asking questions, Google can argue that if the government didn’t do anything about the Microhoo merger, then it should lay off Google too.
It’s fun to toss around these Machiavellian theories, but I doubt Google actually thought all this through before it reacted. Whatever the explanation, now that it has reacted, it’s stuck with the consequences of its reaction – just as Microsoft is stuck, for better or worse, with its offer to buy Yahoo.
