Does Microsoft need Yahoo or Yahoo needs Microsoft??

Lately, I have been avidly following the merger of the century "Microsoft bidding for Yahoo" and failing to acquire because of price negotiation. Following that and not so great results quarter results from Microsoft, there were reports that Microsoft needs Yahoo. The reasons given were that Microsoft cash cow is drying up and it needs Yahoo to create credible presence on the internet. I tend to think otherwise and believe that Yahoo needs Microsoft. This merger would be more in benefit for Yahoo than for Microsoft.

What does Microsoft gain by acquiring Yahoo. There are four reasons, firstly the 16% of the digital advertising market. Secondly, the number of eyeballs yahoo commands, and thirdly the web infrastructure (such as Hadoop). Lastly, the engineers at Yahoo. Microsoft already commands 10% digital advertising market, and commands substantial eyeballs too. If Microsoft pulls its weight than it might not be still able to tackle "Google the internet giant" but it can definitely rival Yahoo. As far as infrastructure is concerned, Microsoft will be releasing its cloud (Ignite) platform. If it throws money than its platform might not be the best but it can deliver the goods. The last point is about engineers at Yahoo. Microsoft is what it is today just because of its engineers. Unfortunately, Microsoft has great engineers but their expertise is not internet based technologies and search engines. So, one the biggest assets of this merger would be acquiring the yahoo engineers. With that pool of people, Microsoft will be able to move much faster. So if I were to prioritize the benefits to Microsoft from this merger would be (a) Yahoo Engineers, (b) Eyeballs, (c) 16% digital advertising, and lastly (d) its web infrastructure.

What does Yahoo gain my going by this merger. Firstly, YAHOO GETS NEAR 70% PREMIUM over its fair valuation (before 30th Jan). Secondly, Yahoo does not have weight or cash to challenge Google or Microsoft. Yahoo has been or very soon will be relegated to the 2nd tier internet company comparable to AOL, at best. Microsoft with its offer brings a huge cash warchest to burn. Microsoft brings its near complete dominance in home and business user PC market. Its software is running on each and every computer in the world. Even though Yahoo engineers use FreeBSD on Apple Powerbook they use Microsoft Office for Mac. The sheer size of PC users and the leverage that creates for any company is phenomenal. If and when Microsoft is able to integrate its PC software with the internet then the success is assured. A mushroom user growth!! What Microsoft needs is one killer PC software to internet integration app along with integration SDK and the valuation of Microsoft is going to increase substantially. On the other hand, Google, AOL, Yahoo are dependent and restricted to the browser application. Their valuation can increase to a certain extent and will hit a glass ceiling sometime, not soon though. The PC software to Web integration would have been the key differential that yahoo could have bought.

Yahoo has been flirting with danger. It has been courting Google for digital advertising and has been sourcing the advertising from Google. Sure, it makes sense that Yahoo will be better able to target the revenues from its page. But, then what is Yahoo doing?? Just hosting webpages!! It is just a zillion times my site?? What will be your business model. Create the best pages for the users?? Why would I be interested in such a thing? Or are they banking on new apps such as Flickr and its search engine to drive the business model and source for cash flow would be google advertising? Or outsource the primary cash flow channel to its competitors. Does Yahoo think that with its few employees (as compared to Microsoft & Google) it will be able to dominate the killers apps on the internet? Somehow, I have a feeling with this option Yahoo has already accepted its fate and relegated its identity to lower valuation in longer time frame just because it is outsourcing its core business and does not have the manpower or cash to attract users by creating killer apps. 

Why is Microsoft playing desperate? Its comments on Yahoo merger were somehow left the stakeholders with jitters and feeling insecure. Moreover, the acquisition spree of Microsoft has been tremendous. It made multi billion dollar acquisitions like aQuantitative and Fast. And now it has not even gotten over the Yahoo hangover that it wants to court Facebook. It takes time to absorb any company and statistically large mergers fail. 

At the end of the day, both the companies face challenging time ahead. Microsoft has the strength to face the rough weather ahead where as yahoo does not have it and taking short term view to scuttle the merger. This merger is more a important for Yahoo than it is for Microsoft.