On many levels, of course, any merger of such a scale can seem an unappetizing prospect that's as much about delivering short-term gains for banks, corporate lawyers and major shareholders as it is about pioneering digital marketing solutions or looking after the individual services that consumers, publishers and advertisers have come to rely on.
Related Chart:Three Merger Scenarios
In that regard, while they're technology companies as much as media players, Microhoo is worryingly reminiscent of the creation of a number of media conglomerates over the last two decades. While those conglomerates' heft has given them leverage in the media-selling and buying equation, they've delivered sporadically, at best, on the promised synergies or product improvement audiences and advertisers might have hoped for.
But by now it's clear Yahoo's unlikely to remain independent, which leaves advertisers, agencies, publishers and consumers wondering which of the proposed combinations works best for them. And realistically, the Microsoft-Yahoo merger has the most upside because it has the potential to be a viable competitor to Google. As significantly, it has the least downside, as it better preserves competition in search and display.
It's also looking like the scenario most likely to happen, but as last week showed, there are other options to consider. Here's how those proposed so far break down.
Scenario 1: First proposed Feb. 1, Microsoft would absorb all of Yahoo to create a stronger No. 2 search player. Additionally, Microsoft would benefit from the third-party network Yahoo is aggressively building; it has deals with companies such as Comcast, eBay and more than 600 newspapers. This scale helps offset any display-ad power Google has amassed through its DoubleClick acquisition.
Microsoft believes eventually there will be two players, itself and Google, offering a full online advertising platform for online-ad buyers and sellers -- everything from ad serving to exchanges to display selling to search. And while a duopoly can sound a bit scary, it is better than a monopoly, as Brian McAndrews, head of Microsoft's Advertiser and Publisher Solutions division, pointed out.
As Ad Age has said before, the challenges for this merger lie in the integration of two enormous and complex organizations. Already difficult, the proposed union got markedly more so when Microsoft CEO Steve Ballmer injected some animosity with a sternly worded, clearly impatient letter last week, giving Yahoo a three-week deadline (effective April 26) to get a deal done or face a hostile takeover. He said Yahoo had already lost value since the original bid and suggested that having to go hostile could lower the bid. In the end, though, it'll pay for Microsoft to pony up now that Yahoo has proved it has other options.
Scenario 2: Should Microsoft not want to go it alone, it can always count on Rupert Murdoch for help. While originally he explored a deal with Yahoo to help it thwart the Microsoft takeover, last week reports surfaced that have him helping Microsoft. A three-way deal could kick in MySpace for a stake in the combined entity. There's also the possibility News Corp. could absorb Yahoo's content properties, leaving Microsoft with the search and technology assets it most covets, although this is less likely as News Corp.'s major incentive in participating is to unload MySpace, which many believe has hit its high-water mark. But consider that MySpace is chock-full of low-value inventory, and Yahoo and Microsoft already have that through e-mail traffic -- they don't need more.
Regardless of all that, the biggest issue is that an additional player complicates matters, both in the dealmaking and the post-deal integration, and history is not on the side of M&A menages a trois. Plus, Microsoft doesn't need News Corp.'s help to buy Yahoo.
Scenario 3: But other parties are also stepping up to wrap their arms around Yahoo. Time Warner and Yahoo have been talking and are very serious about a deal that would have Time Warner contributing AOL plus cash in exchange for a 20% stake in a combined entity, according to The Wall Street Journal. Yahoo would woo shareholders by promising to buy back some of its stock (with the cash from AOL) at a price higher than what Microsoft is offering. And partnering with Google on search could help sweeten the deal.
But who really wins in this merger? Time Warner -- it gets to unload its nine-year Achilles' heel, AOL. And Google -- Yahoo would likely have to strike some sort of business relationship with the search giant to better monetize its search traffic.
A trial has already begun. Last week, Yahoo announced it would begin testing Google search ads on up to 3% of the search results on Yahoo-owned sites. A small test is one thing; more comprehensive plans would most certainly face regulatory scrutiny.
And for advertisers, having search so highly concentrated in a single system is a bad thing. If the test were successful and Yahoo struck a deal to outsource its search to Google, "that would give Google an effective monopoly over search, which wouldn't be healthy for marketers or the overall internet economy," said Bryan Wiener, CEO of New York-based agency 360i. With this idea, he said, "It seems like Yahoo's running away from Microsoft into a potentially more dangerous bear hug."