Who's Afraid of Micro-hoo? Not Google

As History Repeats Itself, Google Will Continue to Worry About Google

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CHICAGO (AdAge.com) -- Seems like we've been here before.

In January 2000, not long after Yahoo hit an all-time peak of $475 a share with a market cap above $100 billion, archrival America Online agreed to buy Time Warner in the biggest media deal in history. Market watchers speculated just what Yahoo would do.

Microhoo:

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In the end, Yahoo didn't pursue any me-too megadeal. The internet bubble popped, stocks tanked and the economy slumped. AOL/Time Warner went down as a huge flop in merger history.

So in February 2008, not long after Google hit an all-time peak of $747 with a market cap of $234 billion, adversary Microsoft proposed its own blockbuster deal. Market watchers speculate on what Microsoft/Yahoo could mean for Google. The stock market is queasy, and we may be in or near a recession. Google shares, which slumped after Microsoft Corp. made its Yahoo bid, have plunged 30% from their November peak. (That's a loss of about $70 billion, more than the current market cap of Time Warner or the $44.6 billion offered for Yahoo.)

So what would a Microsoft-Yahoo deal mean for Google? Short answer: less than you may think.

Two floundering companies
Google can take comfort that media megamergers often fail to deliver on promises. It's not easy to merge great companies. It's even harder to merge two floundering companies. It's open to question whether Microsoft, after a decade as digital media also-ran, can fix Yahoo, the fumbling internet giant.

Google's biggest challenge isn't Micro-hoo. It's Google.

Search is the sweet spot of internet advertising, and Google dominates with a 62.4% worldwide search share in December, according to ComScore qSearch. Yahoo (12.8%) plus Microsoft (2.9%) will remain a distant second.

Yahoo and Microsoft have a dubious distinction: Their search shares have been shrinking (down a combined 4.6 points in the U.S. over the past year) while Google has grown (up 5.8 points). Google stands a good chance to gain more share while Yahoo and Microsoft are distracted by deal-related matters -- coming to terms; considering alternatives; selling a deal to investors and regulators.

Problems at home
Google's stock, meanwhile, has tumbled in recent months on worries that its easy-growth days are over. Before Microsoft announced its Yahoo bid, Google shares fell sharply in after-hours trading Jan. 31. Google closed Feb. 1 at $515.90, down 8.6%, in the biggest decline since its August 2004 initial public offering. But the drop mostly was a reaction to financial results, not to Microsoft/Yahoo.

Given Google's size -- $16.6 billion in 2007 revenue -- it's no surprise its growth rate is slowing. A bigger matter is the future of search. It's the hottest space in digital advertising today, but will it remain so?

Yahoo started in search and diversified over time into a broad-based digital-media company. Yahoo stumbled on execution. But there's a lot to like about diversification; it's better to be a transportation company than a railroad, and so in theory it's better to be a diverse digital-media player than to be the one-trick-pony of search.

It's up to Google to figure out a future that will keep the company on top. It is sitting on $14 billion in cash and a still-valuable stock, giving it the currency to do some deals to map its future. But rich media companies have a habit of doing bad deals.
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