I’m often fascinated by mergers, or I should say I’m fascinated by how often they are attempted and how rarely they succeed.
While it may appear that smaller mergers are more successful than larger ones, the reality is smaller merger failures are vastly easier to cover up. Very few mergers actually deliver the benefits that were promised by their advocates. There are, however, some companies that stand out as merger experts, and they include Cisco, Oracle, EMC, Logitech and with one big exception, Symantec. You’ll notice neither Microsoft nor Yahoo is on that list.
In this recent case, Google emerged as an expert manipulator. Behind the scenes they may have assured this deal would fail through subtle influence. Because so many jobs are put at risk by poorly thought-out and/or poorly executed mergers, let’s look at the lessons learned from this failure to see if we can help others from making similar mistakes.
We’ll close with our product of the week, which, thanks to my really getting a kick out of watching “Iron Man” last week, is Corel’s new WinDVD 9 product. This is an offering that makes movie watching on the PC wonderful.
Microhoo: Designed to Fail
One of the first things any company, particularly Microsoft, should have learned is that threats and attorneys don’t work when trying to build an alliance. A merger is an alliance, and Microsoft has had some very powerful ones, and others that seemed impossible. Initially with IBM, the alliance required personal face time between the founders and the IBM executives. When Steve Jobs created the alliance with Bill Gates after taking over Apple, he flew up and met with Gates personally. When Scott McNealy, a long-time Microsoft hater, wanted to create an alliance, he flew up and met with Steve Ballmer.
For this to work, one of the CEOs needed to take the effort to meet with the other at the outset and just chat about and at least understand where both were coming from. This is because both firms were operating under false assumptions.
Yahoo was operating under the assumption that Microsoft was low-balling its bid and clearly saw that Yahoo was worth vastly more; Microsoft was operating under the assumption it was over-bidding and offering substantially more than Yahoo was then worth in exchange for closing the deal rapidly.
In reality, Microsoft’s perceived value for Yahoo and Yahoo’s perceived self value were far more distant than the bid and counter offer would indicate. The gap was probably more than US$10 a share — or far more than the perceived $4 a share that they seemed to have at the end — and neither side seemed to understand that.
With that kind of a gap, it already was incredibly unlikely the two sides would or could come together, but the gap should have shown that Microsoft’s one bid strategy would be unsuccessful. When there is this big a gap, a negotiated price is typically a more successful path because it forces both sides to reconsider their initial assumptions on price.
The Attorney Rule
I used to run an acquisition team — actually that is inaccurate, I used to run an acquisition clean-up team. My folks would come in after a company was acquired, assess how bad a disaster it was, design a plan to turn the unit around, and often stay and implement the plan until new, better-qualified executives could be found.
A lesson I learned by watching the folks who actually made the purchases in the first place was that the success of a deal is inversely proportional to the number of attorneys directly involved with it.
One thing you learn about attorneys is that they are only at personal risk if they say yes and are wrong. If they stop a deal, the blame resides with the decision makers who then feel they walked away for good reason.
If the deal goes through but goes bad, the attorneys are held accountable — and there is no possible way any attorney can anticipate everything that can, and often will, go wrong. If the deal goes well, someone else generally gets the credit, so the system grooms attorneys to get in the middle and screw things up.
Trust Is Key to a Good Deal
The guy who first trained me in contracts said that a contract is only to assure people will do what they already plan to do. This makes trust key to any deal — I fundamentally don’t believe in doing deals with people you can’t trust. It almost always ends badly.
In this instance, particularly in Silicon Valley, Microsoft is not trusted. There is a long history as to why this is the case, but missed deadlines, promised products that never show up, programs like “Plays for Sure” that are abandoned, questionable practices like “Get the Facts,” and a reputation for not following through form the foundation for this lack of trust.
This makes doing any deal a nightmare because the folks negotiating with Microsoft can’t take anything Microsoft says at face value. HP, IBM, and even Oracle are vastly more trusted and while they too can have merger difficulties, none of them have as much difficultly being believed.
Personally, I think if Microsoft could deal with its trust issues, then it would significantly increase its sales, profit and valuation — and it certainly would make mergers like this go better. Don’t undervalue trust; in fact, were Microsoft more trusted I’ll bet this deal would have been done regardless of everything else.
Watching Google, it is clear that it is executing on a complex plan to deny Microsoft revenue. I really think Google is trying to put Microsoft out of business. Google is forcing Microsoft to fight Google on Google’s home turf and, while Microsoft is distracted, Google is working behind the scenes to eliminate the profit associated with Microsoft’s foundation products: Office and Windows.
Google Apps is effectively an enhanced Office that can be used to keep people from buying new copies of Office but not necessarily to get rid of their old ones. For Windows, Google covers the desktop with Google tools, which hijack all of the Web advertising revenue though Google gadgets, Google home pages and Google search bars. For XP, it is doing more to enhance that product visibly than Microsoft is, which likely is contributing to the lack of Vista adoption.
In this instance, Google appears to have been the trigger for Microsoft’s attempt to buy Yahoo in the first place; then Yahoo got involved with Google during the process in an apparent effort to make Microsoft become so angry its people made mistakes.
Google showcased itself to be an excellent manipulator on the cellular spectrum auction. We’ll likely find Google’s fingerprints all over this deal — the apparent plan was to keep its No. 2 and 3 competitors focused on doing each other damage.
It appeared to be brilliantly done until the end when it fell apart, because I believe Google wanted Microsoft to opt for a hostile takeover of Yahoo, which would have allowed Google to come to Yahoo’s defense.
By doing that, Google could have been allowed to “help” Yahoo out by taking the advertising responsibility off its hands and become a true monopoly in its chosen segment. That didn’t happen, but it came really close. I think Google is “gaming” Microsoft. Watching Google at work is a lesson on how to creatively take on — and take out — a larger competitor.
Product of the Week: Corel’s WinDVD 9
I love movies, and the recent “Iron Man” release was my first big summer treat. (Make sure you watch the credits all the way to the end for a hint about “Iron Man II”). I watch a lot of movies on computers, and the most capable tool for that on the PC platform is Corel’s WinDVD, now in its ninth version. It now supports Blu-ray and HD-DVD.
One of the features that folks who love this product rave about is the ability to fast-forward while still being able to hear the dialog (handy for those female-focused parts of action movies that you really don’t need if your wife or girlfriend isn’t in the room).
It has high quality and it seems to have strong hardware support, but in any case, given my excitement over “Iron Man” and that this is the best movie player I know of, Corel’s WinDVD 9 is my product of the week.
Rob Enderle is a TechNewsWorld columnist and the principal analyst for the Enderle Group, a consultancy that focuses on personal technology products and trends.