Microsoft To Buy (Swallow) Yahoo...Again? Please, God, No.

Henry Blodget: The New York Post reports that Microsoft is urgently trying to buy Yahoo again, in part because it's sick of losing deals to Google (and, no doubt, sick of losing to Google, and Yahoo, and AOL, et al...).

Would it be a smart strategic move for Microsoft and Yahoo to combine forces?  Absolutely.  Is the best way to do this to have Microsoft suck Yahoo into the massive Windows/Office borg?  Absolutely not.  If Microsoft buys Yahoo, Microsoft should immediately spin the Yahoo-MSN business out as a separate company.  If it doesn't, both Yahoo and MSN will die.

With all due respect to the amazing talent and resources at Microsoft, no company can do everything.  Microsoft is now so massive and broad that it is competing with IBM and Oracle on one end, and Sony, Apple, Google, and Yahoo on the other.  All of these businesses are complex and tough, and focus is a major advantage. 

In the past 12 years, despite its enormous talent, power, and desktop/browser monopoly, Microsoft has done no better than become an Internet also-ran.  Why?  In part because of internal politics: In Redmond, the Internet business will always be second-fiddle to the Windows/Office cash machine--especially when the Internet business may increasingly compete with the Windows/Office cash machine.  In part because of talent: Why would the best Internet talent want to work in a small division of a massive company, kowtow to Windows/Office kingpins, and get paid in stagnant Microsoft options, when he or she could become a billionaire at the next Google?  By the way, Microsoft is not unique or flawed here: It is for these reasons (and others) that few, if any, dominant industry leaders in one technology wave have also dominated the next one.

If Microsoft spun out Yahoo-MSN, the company would be able to recruit the best talent, run it's own show, and, if necessary, compete with Microsoft (which it would never be able to do freely as a division--this is the primary reason an outright acquisition would be a disaster).  The company could have an exclusive technology deal with Microsoft and get first crack at all partnerships.  Most importantly, existing Microsoft and Yahoo shareholders would benefit from all the upside--because they would be the combined company's single largest shareholders.

The only folks who would get hosed in such a deal, in fact, would be existing Yahoo shareholders, who would get socked with a cap-gains tax bill.  This is why a better plan would be for Microsoft to just swap MSN and a few billion dollars for a major (but not majority) stake in Yahoo. 

Alas, this sensible solution seems unlikely...because ego will get in the way.

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