Farewell Microhoo, we never knew you...

After three months of tight negotiations, it has finally been announced that Microsoft will walk away from its bid for Yahoo because the two cannot agree on an acceptable sale price. The whole world has been watching this proposed merger intently, as it may have been the deal to change the plate tectonics of the technology age.

But how did it all start? Well, unless you’ve been living under a rock you’d have felt the force of Google. The fact that Webster’s New Millennium Dictionary of English recognises “to google” as “to search for information on the Internet, esp. using the Google search engine” speaks volumes about its not-so-subtle influence. Not even ten years old, it has dominated the European search engine market with a market share of more than 80%.

Enter Microsoft. Despite boasting a market share of 90% in personal computer operating systems, it recognises the necessity of diversifying its revenue streams in response to shifting demands and has been looking enviously towards the internet advertising market. However, its own search engine Windows Live can be described as less than successful. So on 31st January, it went for the fastest method possible and made an unsolicited takeover bid for Yahoo at $44.6bn.

Despite posting losses for all four quarters of 2007, Yahoo rejected that initial bid on the basis that it “substantially underrated the company’s value and prospects”. Microsoft then raised its original offer to $47.5bn, and then withdrew the offer yesterday when it heard that Yahoo insisted on at least $53bn. Over the last three months we’ve seen Yahoo’s share price skyrocket by 70% amidst expectations of higher bids. But we’ll see a lot of irate shareholders who will see a lot of that investment evaporate when the markets open on Monday. Microsoft shareholders will be feeling less choked while Google will of course be pleased that they will no longer have to deal with one super-opponent.

Possibly the most interesting thing about this bid is how the reaction of the general consensus. Textbook theory administers that a more concentrated market is normally A Bad Thing™ but it seems like everyone including the competition watchdogs have been encouraging this deal. Everyone but Google, of course. The reason for this comes down to the keyword in market theory: competition. Google has already established itself a strong monopoly position in the online search engine market, and its next biggest competitor Yahoo can hardly be called a competitor at all (a meagre 8.5bn searches per month as opposed to Google’s 37bn).

Everyone’s expectance is that this proposed merger will actually increase competition rather than decrease it. Through rationalisation, Microsoft is expected to recoup the economies of scale available in taking over Yahoo. This will certainly create a more worthy adversary for Google. In the long-run, two competing giants will be more beneficial to consumers than a complacent one and two struggling dwarves. Whether “Microhoo” would’ve integrated so well is another matter however. Yahoo takes a lot of pride in its brand and may not want to sully its reputation by joining forces with The Dark Side. As Mark Shuttleworth puts it, “talking to Microsoft employees I get the sense they realise they can’t transform that company into a Windows-based company without killing it.” I guess we’ll never know.