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Failed Merger May Help Both Click

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The Associated Press

Published: May 6, 2008

Sure, things look rough for Yahoo Inc. and Microsoft Corp. because they couldn't agree on a deal. Yahoo's stock has cratered, and Microsoft has to figure out another way to catch up in the online ad market, a flaw it was willing to pay $47.5 billion to fix it.

In the long run, however, Yahoo's rejection of Microsoft's acquisition offer could turn out to be brilliant for both companies. Sometimes the best deals are the ones you don't make, especially in technology, where big mergers and acquisitions are notoriously difficult.

Instead of turning into the next AOL Time Warner - a deal regretted enough that the acquirer's name, AOL, eventually was dropped from the corporate title - perhaps Yahoo and Microsoft will be like other companies that were better off after their proposed linkage got scuttled.

Take Comcast Corp. and Walt Disney Co. When Comcast spent two months of 2004 pursuing Disney in a bid originally valued at $54 billion, the cable company was chasing the notion that it needed to be an owner of entertainment content, not just a distributor.

After Disney sought to stay independent (like Yahoo) and Comcast's shareholders were dubious about the high price (like Microsoft's), Comcast dropped the bid, saying that focusing on distribution was not so bad after all.

Disney ended up revitalizing itself by making its own acquisition, of a more natural partner, Pixar Animation Studios. Meanwhile, Comcast settled for a slice of the MGM studio and ownership of smaller content producers such as the E! entertainment cable channel, and it has been able to concentrate on competition from telecommunications companies encroaching on the cable business.

Considering the wild swings of the entertainment industry, Comcast should be happy "not to have that rocking horse to ride at the same time," said analyst Charles King of Pund-IT Research.

Given that Microsoft sought the gigantic tie-up with Yahoo in hopes of better challenging Google Inc. in online search and advertising, Microsoft should be glad it stepped away from buying business software maker SAP AG as the companies discussed in 2004. That wouldn't have prevented Microsoft's Internet problem, and it likely would have caused regulatory and operational headaches.

For its part, by pursuing a separate path, including smaller acquisitions of its own, SAP shares are higher than they were at any point in 2004. It's difficult to know how things would have turned out if these and other unfruitful tech merger talks had succeeded.

Maybe Sun Microsystems would have been able to save Apple Inc. as well as Apple turned itself around after the companies decided against combining in the 1990s. Perhaps Yahoo wouldn't need to worry about Google if it had bought eBay Inc., as the two sides discussed in 2000. Certainly Yahoo might like to own Google, which was a possibility in 2002 talks before Google went public and saw its value multiply.

Quite often, the particular cultures or product lines of tech companies are so hard to combine that the perceived advantages of large mergers and acquisitions dry up quickly. That's one reason why Forrester Research Chief Executive Officer George Colony went so far as to say a Microsoft-Yahoo deal would have been "a disaster."

At the very least, if Yahoo and Microsoft aren't better off apart, then they may be no worse off. Emery Trahan, a professor of finance at Northeastern University, pointed out that General Electric Co. and Honeywell International generally have done fine despite dropping their acquisition plans under regulatory pressure in 2001.

"It's not necessarily a failure to walk away," Trahan said. "It might be more of a failure to push for a deal under terms that don't make sense."

It remains to be seen, however, whether Microsoft and Yahoo will fall into this category. If Yahoo management fails to improve the company's fortunes, or no other suitor emerges, Microsoft and Yahoo could end up mating after all.

Yahoo shares shed $4.30 on Monday to close at $24.37, well below Friday's close of $28.67, when investors were still hopeful about a deal.

Despite the backlash, analysts doubt Yahoo shares will fall back to their $19.18 prebid price, partly because some investors may be holding out hope that the software maker will renew its takeover attempt if Yahoo continues to struggle.
Google shares rose $13.61, or 2.3 percent, to close at $594.90. The company not only averted a marriage it had fiercely objected but also began discussions that could lead to a long-term advertising partnership with Yahoo, a deal made more likely with Microsoft's withdrawal. Any Google-Yahoo alliance, though, would likely face antitrust hurdles.

Meanwhile, shares in Microsoft fell 16 cents, or 0.6 percent, to close at $29.08.

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